With iPhone revenue flat despite higher average selling prices, Apple is increasingly looking to Services to provide future revenue growth. It’s therefore not surprising that the company would be doing everything it can to maximize those revenues.

But if a WSJ report is correct, that Apple is seeking a 50% revenue cut for an upcoming subscription news service, the company could be shooting itself in the foot …

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The deal Apple is reported to be pitching is one which sees Apple make way more money that the publishers.

Apple is reportedly pitching a revenue split that sees it keep 50% of a suggested $10/month membership fee with the remaining 50% shared among participating publishers. The WSJ says negotiations are ongoing, adding that publishers aren’t likely to accept the revenue split as presented.

With Apple keeping half of the revenue earned from the service, the remaining half would be divided between partners based on usage among subscribers.

So Apple gets $5, everyone else gets some unknown share of the other $5.

Magazine publishers are on board

For magazine publishers, the deal could make sense. Magazine publishing is in decline. Sales of paper editions have been hit particularly hard, and it’s tough for smaller magazines to persuade people to pay a worthwhile sum for digital access. There’s just so much ad-funded free content out there that digital sales are a tough proposition for all but the top-tier magazines like The New Yorker.

As Recode noted yesterday, it’s not a question of whether or not magazine publishers will sign up: they already have. To Texture, to Magzter, to others.

Apple has already signed many publishers to deals where they’ll get 50 percent of the revenue Apple generates through subscriptions to its news service, which is currently called Texture and will be relaunched as a premium version of Apple News this spring.

And some publishers are happy to do it, because they think Apple will sign up many millions of people to the new service. And they’d rather have a smaller percentage of a bigger number than a bigger chunk of a smaller number.

In the words of a publishing executive who is optimistic about Apple’s plans: “It’s the absolute dollars paid out that matters, not the percentage.”

Additionally, Apple lets publishers keep 100% of the ad revenue their magazines bring in.

Newspapers are different

But the equation is a very different one for newspapers.

A study conducted a year ago found that the median monthly digital subscription for a US newspaper was $10, sometimes sold as a weekly cost in the $2-3 range.

And this is just the average across a wide range of papers, the majority of which aren’t household names outside their own state. Examples include the Arizona Republic, Hartford Courant, Honolulu Star-Advertiser, Orlando Sentinel, Savannah Morning News and the South Bend Tribune. When they can bring in that kind of revenue directly, it makes no sense for them to sign up for a mystery share of $5/month.

It makes even less sense for the big boys, like the New York Times and the Washington Post. The top-tier papers can and do sell digital subscriptions for upwards of $30/month.

Is Apple being dumb or smart?

So on the face of it – assuming the WSJ report is true (noting that it should be in a position to know) – Apple would seem to be making a hopeless pitch. Allowing greed and an over-inflated idea of its own importance to override a realistic understanding of the market.

In principle, Apple could strike differentiated deals. Offering 50% as standard, but very much higher cuts to the top-tier papers.

But, as far as we know, it’s never done that. There has been the occasional unsubstantiated rumor, but the overriding view is that Apple has always offered the same take-it-or-leave-it flat-rate percentages to everyone.

If that’s the case here, and Apple won’t budge from its 50% proposal, then it would be a dumb decision. The top-tier papers aren’t going to sign up, and trying to persuade people to pay $10/month for a subscription news service that doesn’t include the most prestigious newspapers would be challenging to say the least. In this case, it ought to be Apple taking the view that a small share of something is worth more than a 50% cut of nothing.

If just the top ten US papers by circulation declined, that would mean Apple would be asking $10/month for a service which includes none of these big names:

  • New York Times
  • Washington Post
  • USA Today
  • Houston Chronicle
  • Wall Street Journal
  • Chicago Tribune
  • LA Times
  • New York Post
  • Newsday
  • The Seattle Times

There is one other possibility: perhaps this is a negotiating ploy by Apple. That really it wants the same 30% it gets from app sales, or the same 15% it gets from recurring subscriptions after the first year, and that it’s going in hard with a 50% opening offer so publishers are relieved to be able to agree the 70-85% Apple really plans to offer. That it isn’t being dumb, it’s being a smart negotiator.

What’s your view? As ever, please take our poll, and let us know in the comments. For the purposes of the poll, assume you get all the papers in the first option, and none of the bulleted ones in the second.

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