Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Subscriptions are most closely associated with old media staples like newspapers and magazines. But decidedly new economy Apple has fallen in love with subscriptions, too. 

Last year Apple launched its subscription online music service, which was mightily flawed but represented the company's biggest foray into selling a product for which people pay money every month or year. Apple also has been trumpeting the iPhone leasing programs available in its U.S. retail stores that let people pay in regular installments -- yes, a subscription -- for a new smartphone instead of plopping down $650 or so upfront. 

And in Apple's latest sign of subscription infatuation, the company is tilting financial incentives in its App Store to encourage developers to sell subscriptions, too. Under a coming App Store shift reported by The Verge, makers of apps for iPhone and iPads will keep 85 cents of every dollar of subscriptions sold to a customer for longer than a year. That's a big step up in revenue sharing from the 70 percent standard cut for Apple's app developers. (Apple keeps the other 30 percent.)

With the shift, developers who sell iPhone video games for $1.99 a pop will have a big incentive to switch to selling subscriptions and keep people paying for years. No doubt, many people will be reluctant to try apps that come with a recurring bill. People have already proved reluctant to pay to download apps, which pushed many developers to make their apps free to download. But the people who do sign up for subscriptions could generate far more revenue. One developer quoted in The Verge report estimated his company could make 10 times its current yearly revenue -- even with half the number of downloads -- if it switched from its current app purchase fee to a $4-a-month subscription.

Apple Pie
The vast majority of Apple's revenue comes from iPhone sales, although the company has been stressing its "services" business including app downloads and Apple Music subscriptions
Source: Bloomberg
Note: Revenue is for the 12 month period ended March 26.

Of course, hooking people on subscription apps benefits Apple, too. It is harder for iPhone owners to ditch their phones for Android devices if it means giving up the ability to access a beloved app.  Apple also must know the financial firepower of inertia and loyalty. People who sign up for a subscription tend to forget to cancel before their credit card gets charged the next year, or people stick around for years and years if they grow to rely on Netflix, their local newspaper or their home Internet connection. The whole tech industry has fallen in love with subscriptions, actually. Even Larry Ellison talks about software subscriptions. 

I've been skeptical of Apple's ability to shift the company from its dependence on selling more iPhones and other hardware to making bigger chunks of its sales from apps, Apple Music subscriptions, AppleCare warranties and digital movies. For one, Apple isn't very good at software. And it remains unclear how highly correlated these Apple "services" are to new device sales, which are heading south. In the last six months, Apple's three biggest-selling products -- iPhones, Mac computers and iPads -- posted revenue declines of 8 percent, 6 percent and 20 percent, respectively, compared with figures in the period a year earlier. 

Still, changing the App Store incentives for developers is the company's biggest bet yet to make Apple less dependent on device sales. Unless Apple can revive sales of its devices, the company's health at least in the short term depends on selling way more of its services -- and the App Store is key. According to estimates from Credit Suisse, Apple's 30 percent cut of app sales was by far the biggest contributor to the company's more than $21 billion of services revenue in the last 12 months. 

App Dependence
Apple generates most of its services revenue from App Store downloads and AppleCare warranty sales, which are most likely tied closely to sales of iPhones and other Apple gadgets
Source: Credit Suisse estimates
Note: Revenue estimates are for calendar year 2015

The daunting hurdle for Apple's huge existing business is that it will take a significant subscription shift to move the needle. The company says there are more than 1 billion of its iPhones, iPads, Mac computers and other devices in active use. For illustration, if there are 600 million households with at least one Apple device , and each starts spending $10 a month on app subscriptions, that could mean $10.8 billion in extra annual revenue to Apple at its reduced 15 percent share of app revenue. That's less than 5 percent of the company's annual sales. 

Subscriptions are no sure thing for Apple or any other tech company. But give Apple credit for experimenting with ways to make developers happier and trying to plug the company's huge strategic problem to boot. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. I suspect developers will figure a way around this.

  2. I don't know how many people or households own more than one Apple device. This 600 million number is purely for the purposes of illustration. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net