Monday, September 26, 2011

Media and the tablet makers: it's dependence on subscription revenue that makes app store fees painful; many consultants push paid content, reject ad models

A few weeks ago I was speaking to a publisher who was about to launch their first iPad app and the conversation naturally turned to dealing with Apple and the App Store. That publisher asked me about what I thought about the 30 percent fees Apple took – doesn't bother me was my response. He was shocked. "How can a publisher survive?" was the quick answer. I asked him what his revenue was last year for his magazine, then asked how much of that came through subscriptions – it turns out that very little did, very, very little as a percentage of all revenue.

"If Apple wanted 30 percent of your ad revenue you would go nuts, but 30 percent of subscription revenue? A drop in the bucket." And so the conversation went.

In the end, it all boiled down to one question: can you sell advertisers on the idea of advertising in a tablet publication?

A Ray Ban ad from an issue of Wired on the iPad.

For many publishers, especially smaller ones, the lure of tablets is to extend their brand and to present their current print advertisers with something new, somewhat more reach, all for no extra dollars. It is the small model they used when they launched their first website: sell print, give away the web. How did that work for them?

Now here we are again, with a new digital product with unknown readership, variable or weak download rates, and start-up costs just like those of the nineties – do you remember talking to your first web developer, I certainly do?

If Condé Nast, Hearst or Meredith were selling digital ad pages like they are able to sell print ad pages, the whole issue of splitting App Store subscriptions revenue would be a nonissue. Publishers would gladly give Apple 30 percent in exchange for the chance to sell more pages.

I was in a store this weekend when I spotted a large issue from one of the major magazine publishers. While waiting to be checked out I picked it up, flipped to the inside back page to see who big the issue was and then pulled out my iPhone to use the calculator. I figured that issue had 55% advertising and guessed at the page rate, then I smiled.

"What?" asked the person behind me, curious as to what I was doing and why I was smiling.

"$18 million. That's what this issue brought in," I said. (It turns out my estimate was probably slightly low.)

The same magazine does very well on the newsstand and has a very large, loyal subscriber base. But the most publisher could ever expect to bring in from readers would be around $2 million per issue since their print subscription prices are so discounted. Despite being a readership power house this magazine is doing well if it can get 5 to 10 percent of its revenue from readers versus advertisers. Other magazines may do better, but it is rate, indeed, for a magazine to have a truly balanced approach to revenue generation, and rarer still that a Consumer Reports model succeeds.

(Many media writers forget to discount subscription prices when calculating circulations revenues, just as many reports lazily take the open rate for advertising as what a publisher actually gets per page.)

Most, almost all, the independent publishers I speak to who are now developing for tablets come from the editorial or design side of the business. Further, almost all the consultants currently advising newspaper and magazine publishers are coming from the editorial side of the business. No surprise then that a heavy emphasis is on how to proceed with a paid content strategy.

One consultant I spoke to talked about ad revenue as "gravy" that would be brought in strictly through ad networks. When they began complaining about Apple fee structure I asked them what percentage of the ad revenue they expected to have to share with ad network they responded that it didn't matter – it was, after all, merely "gravy".