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I posted this to my blog a few days ago, but I think it's worth repeating here because it applies directly to this open letter:

While apps and content are just break even businesses for Apple, they are instrumental to the company's financial success. The iPod, iPhone, and iPad are each technology platforms that bring together consumers, apps, and content. The value of each platform (iPod, iPhone, and iPad) to consumers hinges on the availability of apps and content; and the value of each platform to app developers and content publishers hinges on the number of consumers that have adopted the platform.

In short, there is a virtuous circle in effect; hardware sales to consumers attract more app developers and content publishers, and more apps and content drive more hardware sales to consumers.

Apple’s new subscription model might strain or even break this virtuous circle. First, since Apple is only requesting 30% of revenues if content is subscribed to through iTunes it will likely cause content publishers to encourage consumers to bypass iTunes and purchase content directly. Over time this may reduce the relevance and significance of iTunes. Second, this 30% cut will compel app developers and content publishers to find alternative, less-expensive distribution channels. Google is the natural alternative given Android and the Android Market, and the company has already launched the “One Pass” payment system, which charges a lower fee (10%).

If this new subscription model is potentially damaging to Apple’s financial success, then what’s motivating Apple to launch such a model?

It’s possible, though very unlikely, that Apple failed to consider the implications of the model and the strain it would place on app developers and content publishers. A second, more likely scenario is that this subscription model reflects efforts by Apple to generate greater revenues and profits from its apps and content business. A third likely scenario is that Apple is trying to create barriers to entry for competing distribution platforms, such as Netflix and Amazon, which will find it cost prohibitive to offer their service through iTunes given the 30% in fees. These barriers may give Apple time to further develop its own content distribution business. The immediate risk that content publishers will turn en masse to Android is low given the delay of Android-based tablets and other connected devices (e.g., connected TVs).

This subscription model may boost iTunes revenues and profits, and it may create a barrier to entry for competing distribution platforms, such as Netflix and Amazon. That said, I believe this move is a strategic mistake. There may be some short-term benefits to Apple, but overall it will strain the company’s relationship with app developers and content publishers. Over time this will reduce the selection of apps and content available via iTunes, reducing the value of Apple products to consumers, thus putting downward pressure on hardware sales. In the meantime, partners and resources will migrate away from Apple, towards Android. Over time this will add further energy to Android adoption for app developers, content publishers, consumers, and hardware producers. Android is already emerging as a force in smartphones. With the launch of Motorola’s Xoom and other tablets, Android will soon gain significant share in the tablet market as well.

After reading this, I am struck with the idea that maybe Apple's reluctance to support flash, is not just motivated by the performance issues. That it could also be that the DRM support in flash would mean that companies could just abondon the app model and just use flash (i.e. Netflix or a flash based Amazon ebook reader).

I believe Jobs actually made this point fairly directly, though couched it in terms like "if people start using 3rd party tools to generate cross platform apps, you wind up with crappy apps that don't suit the platform, have undesirable performance characteristics, and fail to take advantage of platform specific features that get added."

Simple thought experiment: iPhone with iTunes and...nothing else. Android with Netflix, Kindle, Hulu...and the rest of the world's content producers. Which one are people going to buy?

Starting to sound like Mac vs. Windows all over again. I thought the App Store showed that Jobs had learned his lesson that the systems with the most software and content win. Putting that at risk fits the classic folk definition of insanity (same behavior, expecting different results).

I use iPod with iTunes. Music comes from amazon.

Of course, next mp3 player will be some no-name brand, I expect. :-)

Good points. I think that Apple is clearing out the competition before they introduce their competing subscription music and movie services. I predict that they'll introduce these in the next few months.

I've been trying to figure out a reason other than greed for this move, and I think you nailed it: It's a barrier to entry for competing media distribution platforms. Apple makes most of it's non-app-store money off media sales and this would be a less obvious way than "we won't let any other media company on our device" to accomplish that. Great insight!

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