Apple Inc. (AAPL) recently changed its guidelines on the pricing of In-App subscriptions on the App Store. Apple also reversed its policy of compelling publishers to use its App store to sell subscriptions.
The altered guidelines were welcomed by publishers who seek to place the digital form of newspapers, music and movies on the iPhone, iPod touch and iPad.
According to the new guidelines, publishers offering their own subscriptions will not be required to offer an in-App subscription through Apple’s iTunes-based applications store, where Apple cumulates 30% of the sales.
Under the new guidelines, publishers are not required to adhere to the “lowest subscription rates through the App Store” policy, which implies that they would be able to charge a higher price and increase dollar profits, even after allowing for Apple’s 30% charge.
However, the new rule still prevents publishers from putting a link in an iPhone or iPad application, which allows access to another website where they could buy a subscription.
Apple also amended its App store guidelines to prohibit applications, which alert users about the location of police at drunk driving checkpoints. Earlier, U.S. lawmakers had criticized Apple for approving the application, citing that these help intoxicated drivers evade police enforcement.
Apple had issued developers guidelines in February 2011 and publishers of existing App store apps were expected to comply with them by June 30, 2011. The guidelines were severely criticized by publishers including the Financial Times and music service Rhapsody for making them share revenue with Apple.
The U.S. Justice Department and the Federal Trade Commission also started an enquiry on whether the guidelines violated any antitrust laws.
We believe Apple reversed its guidelines primarily to avoid further legal hassles. The company is already facing a number of legal suits against Nokia Corp. (NOK), Samsung and Eastman Kodak (EK).
The company, along with Google Inc. (GOOG), has been facing increased scrutiny over its alleged involvement in infringing users’ privacy. A further anti-trust probe would have increased complexities going forward, in our view.
We also believe Apple changed its guidelines to maintain its healthy relationship with the publishers and not to alienate media companies going forward. Although major players in the publishing industry such as The New York Times, Hearst and Condé Nast agreed with Apple’s prior guidelines, many current publishers such as Rhapsody have threatened to remove their apps.
The British daily, The Financial Times ignored Apple’s guidelines and released a web- based application on June 7, which allows iPhone and iPad users to access its content without using the App Store.
We believe the revised guidelines will pacify the current publishers who are worried about their future revenue stream. Moreover, Apple’s lenient approach will also help it woo prospective media companies and will enrich its App store contents going forward. This will boost sales of gadgets such as iPhone and iPad, as a large supply of content and apps will be a major attraction for customers, in our view.
Apple reported iTunes sales of $1.4 billion, which was 5.7% of total revenue of $24.67 billion in the third quarter ended March 31, 2011.
Apple is promoting newspaper and magazine subscriptions in the next update of its mobile operating system iOS. iOS 5, which is expected to launch this fall, featuring a digital news stand that automatically adds the latest editions on the user’s subscription list. We believe these features will further drive iPhone and iPad sales.
Conclusion
Apple is expected to maintain its dominant position in the mobile subscription market due to its top-selling devices iPhone and iPad. The scale and diversity of Apple’s app universe 425,000, roughly twice as many as Android’s is a big reason that consumers have purchased more than 200 million (cumulatively) iPads, iPhones, and iPod touches, which have been a major source of revenue for Apple in recent times.
However, we believe that increasing competition from Google’s Android and Honeycomb operating system-based smartphones and tablets will keep Apple on its toes going forward.
According to research firm Evans Data, the percentage of developers writing apps for Android (43.5%) has passed the share working in iOS (39.7%). While Apple dominates a certain high-end market, Android is more popular among other phone makers and wireless carriers. This remains a major concern for Apple in our view.
We maintain our Hold rating over the long term (6-12 months). Currently, Apple has a Zacks #3 Rank, which implies a Hold rating in the near term.
