Commentary

Rewriting Apple's History

As Mark Twain put it, "Very few things happen at the right time, and the rest don't happen at all. The conscientious historian will correct these defects." Normally the winners write history, but Apple's success and lofty stock price has given a number of media executives a bad case of P/E envy. They're distorting the past by accusing Apple of dictating terms of media consumption on the Internet.  

 

For example, when Apple convinced the recorded music industry to sell digital downloads in 2003, it allocated 70% of the sales proceeds to the record labels and music publishers. One might suppose a business partner would be happy with a 70% share of incremental revenues, especially when that partner incurs almost no added cost. Perhaps they actually were smugly pleased with the deal originally. Maybe they figured Apple had been suckered into giving them more than twice as much as it kept for itself.  

However, despite rapid growth at iTunes, industry revenues through terrestrial channels steadily dropped. In order to deflect responsibility, music executives needed an outside villain and gradually put the blame on Apple.  

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Their narrative holds Apple responsible for three false reasons.  

One was that it unfairly "dictated" consumer prices.  This complaint ignores the fact that retailers nearly always manage price tags in their own stores. Expressed more accurately, mark-ups are from the prices "dictated" by the supplier.  

Another second fiction is that Apple destroyed the music album. In reality, inherent digital media capabilities deconstructed an artificial construct known as the CD. Consumers simply don't want to be forced into buying 12 songs when they only like two or three.  As Will Rogers put it, "If I don't agree with you; well, why should I?" Like the cowboy philosopher, online retailers and consumers simply have a different perspective than the labels.  

The final bogus complaint is that Apple earned excessive profits from the iPod, while leaving only peanuts for the recorded music industry. In reality, iPod gross margin percentages are probably less than half of the 70% share the labels and publishers get at iTunes.  

More recently, other established industries promote the false narrative. For example, one stock analyst laments that the iPhone extracts value from wireless carriers and gives it to Apple. The complaint ignores that the iPhone has been a huge success for AT&T despite the carrier's own failings to meet bandwidth requirements. Prior to the iPhone, operators typically restricted smartphone access to a "walled garden" on Internet content. The iPhone convincingly demonstrated that consumers perceive no difference between a "walled garden" and a "walled prison." 

Finally, the iBook Store announced along with the iPad tablet computer is offering publishers a generous margin together with pricing flexibility. As with third-party apps and digital music, Apple gives 70% of proceeds to book publishers. Furthermore, publishers can generally set retail prices between $13 and $15, as compared to the $10 price often set by Amazon.  Presently, Amazon typically pays e-book publishers 50% of the price for a bound copy of the same book. It often retails the e-book for $10 regardless of the amount paid to the publisher. That means that Amazon is sometimes selling e-books as loss-leader promotions. Nonetheless, it does not let publishers "dictate" price tags applicable to consumers.   

Video publishers should not let the phony narrative jaundice their opportunities with Apple. Unconfirmed reports suggest that Apple proposed a subscription service that would have permitted "The Best of TV" shows to be available via iTunes for a monthly fee. Apparently Hollywood turned it down to avoid alienating the CATV industry. If so, they failed to realize that CATV operators make nearly all of their profits from ISP and telephony service. As content providers demand ever-higher fees, CATV operators will abandon them and focus on ISP, telephony, and other non-content services. 

When revisionist historians get involved, the future is more predictable than the past.

6 comments about "Rewriting Apple's History".
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  1. Brian Hayashi from ConnectMe 360, February 2, 2010 at 4:02 p.m.

    Whether you are a tenant in an apartment or a subscriber to cable TV, the landlord gets none of the credit for doing things right and 100% of the anger when there are surprises. This happens even when they did everything right!! The ability to manage blame is actually good, because it shows the ability to generate predictable recurring cash flows.

    That being said, I don't think you're quite right when you claim CATV operators - nee MSOs - "...make nearly all of their profits from ISP and telephony service." CATV operators charge subscribers a monthly fee for cable TV service, and often pay cable TV networks a modest per-subscriber fee. In this case, Apple's proposed service would likely violate a number of existing programming distribution agreements and jeopardize significant monthly cash flows.

    While ISP and telephony services may be more profitable in the short term, I am unable to see how that leads to the conclusion cablers will abandon traditional video subscriber fees.

    PS A funny bit of history: Steve Jobs relies on a license from MPEG-LA to operate the DRM behind iTunes. MPEG-LA was founded by the MSOs to roll up the various IP and help them find ways to commercialize the value of their digital compression patents.

  2. Phil Leigh from Inside Digital Media, Inc., February 2, 2010 at 4:48 p.m.

    Thanks for sharing your thoughts, Brian.

    According to the Time Warner Cable 2008 annual report, the company's ISP service generated $4.2 billion in revenue but had costs of only $0.15 billion. Translates to a gross profit margin of about 96%.

    Excluding non-recurring charges, ISP gross profits *alone* represented over two-thirds of Time Warner Cables Operating income. They did not show the profits from Telephony service but its margins are no doubt much higher than CATV service.

    In short, in may well be the case that all, or nearly all, of Time Warner Cable's profits came from ISP and Telephony services.

    http://www.wired.com/images_blogs/photos/uncategorized/2009/04/09/chart_broadbandstats.gif

    -- Phil

  3. Brian Hayashi from ConnectMe 360, February 2, 2010 at 9:52 p.m.

    Hi Phil - As a member of the @Home launch team for TCI (and now Comcast), I'm pleased as punch to hear that statistic. Early cable data pioneer and Teleport CEO Curt Hockemeier had predicted data services would become the most profitable service for MSOs as early as 1993. I'd argue, though, that instead of moving towards the abandonment of video subscriber fees, Comcast has fought for over a decade for the right to cache video content at local headends. Comcast is using its facilities to further differentiate itself from satellite and other IPTV providers. If anything, I'd expect a decrease in overall profitability as Comcast encourages VOD over its ISP network.

  4. John Ingham from John INgham, February 3, 2010 at 6:13 a.m.

    Re points 1 & 2 of Apple's misdeeds:

    I was Head of Content at UK mobile operator O2 from 2001 - 06. We built and launched the first over-the-air mobile music download service outside of Asia and were talking to music labels as early as 2002. Whatever we may have wanted to do commercially, they dictated the financial terms and percentage-wise were very very similar to the ones Apple struck. From what I've read, Apple got the price point in place, but the payment to the labels was almost certainly dictated by them.

    As to destroying the album, the first thing we noticed customers do once we launched the service was pick and choose the tracks they wanted. You only had to hear consumers at the time talk about the value of a CD album to know they were well aware it was a couple of good tracks weighed down with a lot of filler.

    If artists do and are allowed to (by their label) make a great album, people will buy it.

  5. Bob Kiger from Videography Lab, February 3, 2010 at 11:15 p.m.

    Attributing your opening quote to Mark Twain may be in itself "rewriting history". I believe that "“Very few things happen at the right time, and the rest do not happen at all. The conscientious historian will correct these defects.”
    is actually an ancient quote by Herodotus.

    I am sensitive to this point because, as a young video producer in 1972, I attributed "There is absolutely no inevitability, as long as their is willingness to contemplate what is happening" to Marshall McLuhan. It was actually a quote by Alfred North Whitehead. My article must have got a lot of attention because a Google lookup will give hundreds of McLuhan references and I've been hard pressed to find out the work where Whitehead made the quote.

    If anybody has a copy of McLuhan's "The Medium is the Massage" you might be able to find it. And if you do, email me a vidaddy at gmail.com and help me solve this 38 year old puzzle. BTW: My original article was "Videography. What Does It All Mean?" AMERICAN CINEMATOGRAPHER Oct1972 edition.

    As to e-book readers, Apple has certainly stoked the flames of interest with iPad, but it is such a limited device. It will be some time and a lot of competition with Google, SONY, Microsoft, Adobe and others B4 the e-book issue is settled. iPad is just a step along the way.

  6. Phil Leigh from Inside Digital Media, Inc., February 4, 2010 at 10:38 a.m.

    Thanks for sharing your thoughts, Bob.

    You have made a common mistake in attributing the quote to Herodotus. In reality the quote is Twain's from his story *A Horse's Tale" in which he *fictionally* assigns the quote to Herodotus.

    http://en.wikiquote.org/wiki/Mark_Twain

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