iPad 2’s Biggest Enemy May Be Apple’s Subscription Plan

While every Apple fan waits with baited breath for Apple’s iPad 2 event later this week, the bigger news already passed earlier this month—one that could have a much bigger impact on the iPad’s future, analysts say.

We’re talking about Apple’s new in-app subscription service written in draconian terms:

Apple’s service forces publishers to offer the lowest subscription price for content served up inside an iPad app. The service disallows app developers to send users outside the app to subscribe (although users can do this on their own). Apple takes a massive 30 percent cut of the subscription transaction.

Such a move will likely hurt Apple’s image, open doors to the competition, and mortgage the iPad’s future. Such stakes underscore the criticality of apps, not hardware, in the tablet wars.

Even if the iPad 2 comes with all the bells and whistles as expected, such as two cameras, thinner and lighter weight, more processing power, more RAM and storage, and a killer price undercutting the new Motorola Xoom, it’s still just a minor hardware upgrade. It’ll move the iPad only a nose ahead of the competition, and they’ll catch up soon enough, analysts say.

“Most of the devices in the market are competing with the iPad based on hardware features,” Gartner analyst Van Baker told CIO.com last year, “and hardware is a minimal part of the equation.”

Software, on the other hand, play a defining role, Baker says. Apple boasts some 400,000 iOS apps lining the shelves of its virtual App Store. Android’s app stores are growing by leaps and bounds every day.

And that’s just the beginning, according to market researcher Forrester. A new Forrester report predicts the combined spend on apps and services will be $54.6 billion a year by 2015.

A Forrester survey in January showed that the average iPad owner downloaded 20 apps and spent $34 on apps. Half of iPad owners said they use the devices to read newspapers and magazines. Sixty-three percent of the money consumers spend on content of all types comes through a renewable subscription, writes Forrester analyst James McQuivey in his blog.

All of which bring us back to Apple’s crucial in-app subscription service. Here are three very big reasons why the move is a bad one:

1. Apple’s New Image: Greed Is Good

The iPad was supposed to be a noble savior, rescuing newspapers, magazines, and book publishers from their Internet-wreaked business models. For a while, it seemed like it was working: During the iPad’s debut, Apple trotted out major book publishers (Penguin, HarperCollins, Simon & Schuster and Hachette Group) in support of the iPad and Apple’s new iBook Store.

In a volley against Amazon Kindle, Apple allowed book publishers to raise prices on e-books and took a smaller royalty (30 percent compared to Amazon’s 70 percent). This pressured Amazon to make massive policy changes that were more aligned with Apple’s policies.

Then Apple unleashed its in-app subscription service. Far from a savior, the service makes Apple look like a bully kicking a guy when he’s down. “We believe that your new policy smacks of greed,” wrote Rich Ziade of Readability, whose iPad app that aggregates news was recently rejected by Apple.

2. The Great Google Counter-Punch

Upsetting iPad app developers, especially ones in the popular magazine and news category, is a risky strategy for Apple. Most big publishers, however, will likely take the hits. They’re eyeing Apple’s 15-million-and-growing iPad user base and lion’s share of the tablet market. After all, what alternatives do they have?

Shortly after Apple brought its in-app subscription service to bear, Google seized the opportunity an announced Google One Pass, a subscription service with only a 10 percent cut of transactions. Even better for publishers, Google One Pass gives them more access to customer information; Apple customers must opt-in to give their information to publishers on the iPad.

Let’s face it, Apple has all the advantages in the super-hot tablet market and could have squashed competitors on price alone. But Apple left the door ajar with its in-app subscription service, and Google slipped in.

When it comes to pitting, say, the Motorola Xoom against the Apple iPad, what matters most? An imperceptible difference in resolution? A slightly faster processor? Or which of your favorite newspapers and magazines are available?

3. Mortgaging the future

“Apple has the industry over a barrel in this regard, and you can’t fault the company for exploiting its advantage for economic gain,” writes McQuivey, adding, “However, you can fault the company for choosing not to anticipate that seeking a 30 percent toll would bring any subscription model of any type to its knees.”

Unlike book publishers that make their money on a best-seller, subscription services vie for repeat business by offering a cheap price (think: smaller margins). This means that Apple’s 30 percent cut is too much for many subscription services to handle in the long run.

“There is not a subscription business alive that can bear that additional cost without passing the cost along to subscribers,” writes McQuivey, calling Apple’s service “short-sighted.”

McQuivey figures a tablet-based subscription fee will eventually settle at less than 10 percent, perhaps in a couple of years. In the meantime, Apple has given Google a great starting point with One Pass, and publishers a much needed alternative.