How Apple Plans to Crush Advertising

Wednesday Jun 27th 2012 by Mike Elgan
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A pundit opines that Apple plans to sabotage advertising for TV and magazines while offering media creators an alternative source of revenue: Sell content on iTunes.

Companies that create content, such as TV shows, movies, books, and magazines, typically don’t sell or deliver their content to consumers.

The selling is usually done by somebody else. For example, publishers make books, but bookstores and sites like Amazon sell them.

Apple is one of those companies that sells content.

Apple sells content the Apple way, which is also called the agency model. Basically, the companies that create the content can charge any price they want to, as long as they give Apple 30 percent.

Apple competes against other companies that also sell content, and most of those competitors don’t use the agency model.

One alternative is the one Amazon uses for eBooks, which is called the wholesale model. Amazon buys books at a negotiated price from publishers, then charges customers whatever it wants to charge. So not only do content creators have zero control over pricing, they don’t even know what prices book buyers will be charged.

Both the agency model and the wholesale model are relatively insignificant in comparison with the top model for monetizing content: The advertising model.

Under the advertising model, the content creator gives away the content free, but litters it with paid advertising.

Network TV, for example, uses the advertising model.

Many content creators use hybrid models. For example, magazines and newspapers use a combination of the agency model (they sell subscriptions via an “agent” -- the newsstands or fulfillment houses) and the advertising model.

Apple’s Podcasts App Reveals a New Strategy

Apple quietly released an app called Podcasts this week. The app enables the discovery, organization and playing of podcasts on an iPhone.

In the past, users listened to podcasts in the Music app by default. The next version of iOS will apparently come with a Music app that doesn’t support podcasts.

Podcasts are currently monetized using the advertising model. Nearly all podcasts are free, but those podcasts that make money do so through advertising.

Here’s a typical podcast app spoken during the show: “This podcast is brought to you buy Audible.com! For a free audio book of your choice, including audio books by David Sedaris, Sarah Vowell, John Hodgeman, go to Audible.com/american.”)

Under the current system, a podcast content creator can make money from ads, but Apple gets nothing, even when it’s downloaded via the iTunes store.

Providing a platform for other companies to make money while Apple makes nothing really isn’t Apple’s thing.

Apple’s new Podcasts app contains two surprising but telling features.

First, Podcasts contains a skip-forward-30-seconds button. The most obvious use for this button is to skip advertising in podcasts, even the kind spoken by the host of the show. (“This podcast brought to you by [skip forward 30 seconds].”)

Second, the Podcasts app has a mysterious “Redeem” button-- but only when you run it on the upcoming iOS 6 version.

It’s not clear what exactly the “Redeem” button will do, but it has something to do with a new way for podcasters to charge money.

So let’s put these two new features together: One makes listening to ads optional; the other creates a way to sell podcasts via iTunes using Apple’s agency model.

It’s a carrot and a stick to podcasters: We’re going to reduce the value of your advertising by letting people skip them; but don’t worry, you can monetize by moving to a paid model.

I think this is the direction Apple intends to move all content available on iTunes.

Even TV?

Especially TV.

Of course, Apple already sells TV shows using the agency model. Right now, you can go on iTunes store and either buy individual TV episodes, or a Season Pass to the show of your choice. An episode of Comedy Central’s The Daily Show costs $1.99, and Apple gets about 60 cents for that purchase.

But the revenue generated by Apple’s downloads is insignificant to the studios compared with advertising and cable revenue.

Still, Apple is already providing a carrot -- a way to monetize with direct purchases by the user. What they have not done is apply the stick. Yet.

Apple sells Apple TV. Most pundits also expect Apple to sell an actual TV set. These TV products enable you to buy TV shows via Apple, and download shows, movies and videos from the Internet. But most of the options are offered either by somebody else’s agency model, or by somebody else’s advertising model.

For example, you can use Apple TV to watch Netflix (wholesale model), YouTube (advertising model) or others.

I believe the Podcasts app holds the secret for Apple’s whole TV strategy: Nudge content creators away from other models and toward Apple’s agency model. Apple will boldly create a way to make TV advertising optional. By doing that, they will “starve” content creators while simultaneously offering them sustenance in the form of selling their content on iTunes.

Once Apple attains significant market share for the TV market, they could enable viewers to skip TV commercials. They may even automate the process.

Apple didn’t invent the idea of skipping commercials. Others have tried it, most recently Dish Network, which rolled out its AutoHop feature on a new super DVR called the Hopper. The DVR can record all the major network shows simultaneously, and after a day, erase all the commercials.

Studios are fighting back. For example, Fox, NBCUniversal and CBS are suing Dish. And Time Warner has a patent for over-riding commercial skipping.

The problem with Dish Network’s ad skipping is that it’s a losing proposition for the studios. Dish uses network programming, but denies the networks full monetization. Dish’s proposition is: Just make less money.

Apple, on the other hand, offers a superior alternative: Studios would be able to charge whatever they wanted to charge. They could make more money.

What Else?

In addition to podcasts and TV, the magazine industry will be targeted next by Apple’s nudging toward the agency model on iTunes. And newspapers.

Again, I think this will be a nudge, not a radical shift. Apple will probably allow an easy way for subscribers to optionally skip ads, while giving publishers freedom to set prices.

Why This Might Work

So the question is: Does Apple’s agency model represent a business model for selling content that is superior to the advertising model?

The answer is: Probably.

TV, newspapers and magazines all have one thing in common: Their business models are in trouble. All these industries are facing certain decline, dwindling revenues and unrelenting competition from Internet-based alternatives.

Something has to change, or these industries will die.

Apple’s agency model is attractive because advertising is an unreliable and unpredictable and constantly declining source of revenue.

If my prediction is right, Apple would offer content creators a predictable and constantly rising source of revenue. Every new subscriber, in fact, increases revenue. The growth model is to simply grow subscribers.

Content creators would still sells ads elsewhere. But on Apple platforms, the content would be generally ad-free.

Ad-free content is attractive to consumers. Apple’s platform gains viewers and subscribers. And Apple’s agency model takes over as the main source of revenue for TV studios, newspapers and magazine publishers.

It could happen. And I think it will.

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