Is Apple (AAPL) stretching things too far?

By: ispeculatornew
Date posted: 02.17.2011 (5:50 am) | Write a Comment  (3 Comments)

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If you have been an Apple investor in the past few years, you have been among the lucky ones as you’ve enjoyed incredible returns backed by sales growth of the best technology products (with the Iphone being introduced on Verizon), which one after the other have turned out to be market leaders and have redefined new products. Tablet computers used to be unknown and little more than a year after the launch of the Ipad, new competitors continue to enter the market as they continue to battle with each other for the crumbles that Steve Jobs left for them. Sure, Jobs’ recent sick leave and a few isolated events have created small setbacks but overall the ride has been very steady.

The proposed change

Apple has decided to put into more forceful application one of its rules; that all applications charging for Ipad outside of the content also offer the users the option of paying through Itunes. The big reason why content providers had not been offering the option is because they need to give Apple a 30% cut on those charges. The charge must be of equal or lesser price. This is just a new extension of the Apple world in which we live.

What it means?: Content providers must now offer the option for users to subscribe through Itunes and forfeit 30% of their revenues.

Huge Risk

As you can imagine, content providers are VERY worried about this and no matter who you are, you have to admit it’s a risky idea. It was obviously not one of the things I said I would have done as Apple CEO. Here is a breakdown:

For users: Overall this should be positibe as users will be able to get everything from Itunes without filling their billing informtation and will be able to deal with Apple for any issues with these apps. The downside is the risk that certain apps take themselves out of Itunes because the 30% cut makes it unprofitable.

For content providers
: the only positive is the simplified billing part. However, giving such a huge cut and so much power to Apple will create major issues for many. It could very much turn into how music studios generally view Apple.

For Apple: There is no doubt that the only company who has a shot of pulling this off right now is Apple. It dominates the app market and even with a 30% cut, it remains heads and shoulders above any other app marketplace. I can see why Apple did this because an increasing number of companies were finding ways to charge outside of Iturnes in order to avoid the fees. That being said, as it continues to battle Android, a few big dropouts could potentially turn the wave around. I for one would be very unhappy if Amazon decided to exit the store and even if it seems unlikely, it remains a possibility.

That being said, there are rumors that some apps such as Netflix might be able to keep things as they are. That will no doubt create controversy and will make the choice even clearer between a closed Apple system or an open Android one. It’s not clear which one users will choose but I think that it does bring more volatility to Apple’s stock. As long as it doesn’t back fire this could be huge for Apple.

The future for Apple?

I think this could mean big things for Apple. If it is able to generate about 30% of all the content viewed on Apple devices (we discussed the new content distribution systems), it might mean that Apple makes more from these cuts than the actual cost of the phone which would make it much easier for Apple to take down the cost of devices such as the Ipad & Iphone.

Disclosure: No current positions on Apple

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  1. Comment by Zavi — February 17, 2011 @ 8:26 am

    30%!! that’s huge! That is bad news for Amazon, small publishers and others…

    Currently I have an iPad and it’s really nice to have all these coool apps. I’m not too sure the new change will benefit for me.

    I guess positive part of this: privacy. Apple will offer the subscriber the option of whether or not to release our personal info to the publisher when purchasing the app “in-store”.

  2. Comment by Zavi — February 17, 2011 @ 10:46 am
  3. Comment by IS — February 19, 2011 @ 1:21 pm

    @Zavi – Yes, tough news, let’s hope he can pull through it.

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