Apple's future: leasing space in App Malls

Apple's future: leasing space in App Malls

Summary: Apple should look to the example of the commercial real estate industry by leasing "Virtual Retail" floor space on the App Store and transform it into an App Mall.

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Apple should look to the example of the commercial real estate industry by leasing "Virtual Retail" floor space on the App Store and transform it into an App Mall.

Over the last few weeks, there has been a lot of discussion about Apple's new policy of requiring publishers/software developers who create content distribution applications for iOS devices to provide in-app purchase capability directly through the App Store as an option if they also have the ability to purchase content outside the App Store, as well as imposing a "tax" on publishers that provide subscriber content on the iOS platform.

While this affects ALL developers of iOS applications from the small to the very large, in particular, this affects e-book vendors like Amazon, Barnes & Noble and Kobo.

On the magazine end, it includes companies like Zinio which converts popular magazines to electronic tabloid formats using their special viewer, various magazine publications with dedicated iOS subscription apps (such as Maxim and Wired, just to name a few) as well as the popular Marvel and DC apps for purchasing electronic comic books.

And as my Editor in Chief, Larry Dignan says, it also affects companies like Hulu, Netflix, Sirius XM and newspapers like the New York Times, all of which have subscriber content that is viewable on iOS on their native apps.

Effectively, if you are an entity who distributes paid content on the iOS platform, you have to now provide an in-app capability to handle the purchase transaction through Apple, which takes a 30 percent cut of each sale.

Most end-users are likely to opt for the in-app purchase of the content rather than use an external interface -- such as the web UI that is used by Amazon's Kindle application, so the content providers are either going to jack up their prices within the App (something that Apple is likely to frown upon) relative to pricing on their own external content distribution mechanisms or suck it up as a cost of doing business on Apple's huge App Store ecosystem.

However, this 30 percent cut for In-App purchases may be too big a chunk of revenue for some paid content providers to swallow. SONY, for example, has reached an impasse with Apple on this issue and their inability to provide in-app purchase through the App Store APIs is likely what is holding up the release of their Reader app.

Unless SONY capitulates on the 30 percent Apple cut of their sales on Reader book purchases and integrates the required in-App purchase functionality into their software, the company is unlikely to do e-book business on that platform.

Apps which currently offer external content purchasing options have until June 30 of this year to comply with the new rules. I suspect that some vendors may eventually decide that Apple has gone too far with their demands, that this cost of doing business is too high, and may withdraw from the ecosystem entirely, in favor of other platforms such as Android which has a much more liberal development and content distribution model.

Subscription-based Android apps, for example, only have to pay 10 percent transaction fees to Google. Alternatively, some of these providers might look at writing web-based content distribution mechanisms that are completely platform agnostic and free from vendor control.

Still, whether Amazon, B&N and some of the other large providers bolt from the iOS platform as a result of these new App Store rules is yet to be seen.

There is however another option for Apple which could be proposed as an alternative monetization arrangement in order to avoid the real possibility of some of their most desired content suppliers on the iOS platform from leaving for greener pastures. They need to take a page from commercial real estate management and turn the App Store into an App Mall.

[It's All About the Virtual Real Estate]»

A flat 30-percent cut of all sales just doesn't fit for some of these content providers at the scale they are operating on. Amazon and its Kindle App, for example, is one of the largest draws to the iPad platform. Shouldn't the terms of how they operate in the Apple ecosystem be more flexible than say, a one-man shop that writes a fart application?

What I envision is Apple allowing certain providers -- ones which are willing to make strong financial commitments to developing on iOS and staying with the platform the ability to "Buy In" to the App Store, effectively setting up their own stores within a store.

This commitment could be in the form of a "Lease", in which the developer commits a certain negotiated up-front payment to cover X number of years of space on their store, in exchange for no per-sale cuts.

Depending on the contract and the commitment of the vendor, leases could be flexible with transaction concessions that could be based on a sliding scale from 0 to 10 percent cuts depending on the "size" of the lease, and whether the arrangement is strictly an up-front lease payment for a multi-year commitment (something that a very large vendor like Amazon might do) or a fee that is paid monthly or annually.

Obviously, this "Lease" is to cover such things as bandwidth costs to download the app from Apple's datacenters (some of which could be quite sizable, such as games) or in-App content from the App Store. Right now, companies like Amazon have their own servers that deliver content directly to the device, but special bandwidth peering agreements could also be made in favor of certain concesssions on lease pricing.

Additionally, a "Lease" for a Store in this new "App Mall" could also cover promotional advertising in the "Store Directory" and banner rotation within the "App Mall" app, et cetera, depending on the size of the commitment.

This type of arrangement is fundamentally not very different than how real malls work in commercial real estate today. Malls are owned by real estate management companies, which lease out stores to companies that operate in malls.

Some mall stores are very large "Anchor" stores (such as Macy's, Lord & Taylor, Saks, Neiman Marcus, Bloomingdales, Nordstrom, JC Penny, Target and Sears) and have to commit to long term leases for large amounts of commercial real estate.

They are "Anchor" stores in the sense that they are the ones that occupy the largest amount of real estate at the mall, and bring in the most amount of retail traffic. Anchor stores have symbiotic relationships with the malls. Malls that don't have anchor stores have difficulty staying in business.

In addition to these large anchor stores, you also have medium-sized stores of various retail space size and in less desirable traffic areas, as well as one-man kiosks that sell things like T-shirts and other kinds of doodads like cell phone accessories. Obviously, the smaller scale operation you are, the less flexible your lease terms are.

This type of model could be translated into how applications and content are sold online. I'm certainly no financial analyst, but I'm pretty sure a company like Amazon would have no problem making an upfront or a yearly financial commitment to be an "Anchor Store" in Apple's new App Mall in favor of much more reasonable or completely relaxed in-App purchasing terms. This would also be attractive to a large gaming company like Electronic Arts, Zynga or even Rovio, or a Marvel or DC Comics.

Obviously, just because these companies would have financial commitments and preferred terms doesn't mean they wouldn't have to follow rules. Just like in a real mall, you can't open up an Adult Video store. There would be certain limitations which would apply to everyone, no matter how big or small you are.

However, long-term commitments should keep the content providers exempt from rate changes for the duration of their lease agreement and also provide for other types of policy exceptions or concessions that a one-man shop taking the 30 percent flat cut might otherwise have to put up with.

Should Apple move from a flat-rate 30 percent cut per in-App transaction to more of a "Mall" model where content providers commit to "lease" agreements in an App Mall? Talk Back and Let Me Know.

Topics: Banking, Apple, Enterprise Software

About

Jason Perlow, Sr. Technology Editor at ZDNet, is a technologist with over two decades of experience integrating large heterogeneous multi-vendor computing environments in Fortune 500 companies. Jason is currently a Partner Technology Strategist with Microsoft Corp. His expressed views do not necessarily represent those of his employer.

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21 comments
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  • RE: Apple's future: leasing space in App Malls

    Interesting analogy. Interesting in that renting space at a mall many times means the vendor is paying overhead disproportionate to the cost of the product or service being sold. Malls are notorius for having high per ft^2 lease rates. This translates into higher retail prices for the product not correlated to the actual value of the product. (Yes, the price vs. value of products can be argued too.) The end result is either a consumer that gets bilked or another store closing at the mall.

    Whether Apple charges a 30% tax or "leases" virtual store front, consumers will end up paying too much and there will be app shops that go out of business. Just like the bricks-'n'-mortar malls.
    7mgte
    • Sigh. You are paying a premium for location.

      nt
      fr_gough
      • RE: Apple's future: leasing space in App Malls

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    • RE: Apple's future: leasing space in App Malls

      @7mgte

      For Apple stores, they would generate more income and for customers to find them easily in their mall outlets. Though this would really affect product pricing since renting a space in these malls is not cheap.


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    • RE: Apple's future: leasing space in App Malls

      Leasing spaces seems to be a nice idea. Apple in the first place is focusing on earning, good for them and bad for us. Yes, additional taxes in the other hand can make our wallet out of juice.

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    • RE: Apple's future: leasing space in App Malls

      @7mgte

      "Apple should look to the example of the commercial real estate industry by leasing ???Virtual Retail??? floor space on the App Store and transform it into an App Mall."
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  • RE: Apple's future: leasing space in App Malls

    It seems like Apple's store is the place to be at the moment. However, it's a high rent district. It's not a store within a mall, it's a store within a bigger store and that bigger store already sells books, music and movies and really looks at you more as competition, that it doesn't really want around, rather than tenant. There is no need for these companies to "pay rent" to Apple when they each already have their own functional malls and ecosystems. Content distributors like Amazon, Sony and co. need to get their web app game together so they can run their stores from whatever device is out there.
    oncall
  • RE: Apple's future: leasing space in App Malls

    Interesting concept and I think Microsoft and Google tried something similar in their maps previously by having billboards in their map domains. Considering your proposal, if Apple goes with virtual store fronts to the kinds like Amazon, Microsoft, Google etc, to sell their apps, would Apple take 30% in the Apps price in addition to the virtual store rent/lease amount? If they charge on both the ends, probably that would increase the prices of the Apps and end user will end up paying more for the same app. If your intention is not that, then it is really a good concept.
    Ram U
    • RE: Apple's future: leasing space in App Malls

      @Rama.NET As I said in the article, an up front multi-year, monthly or yearly commitment to a lease would be in lieu of the 30 percent cut.
      jperlow
      • RE: Apple's future: leasing space in App Malls

        @jperlow <br>Then that is really a good one, because Apple gets a consolidated income upfront from the lease agreements and deposits, etc. And the shop owners will get all the facilities and amenities like the real world counterparts would get. If I am content publisher, I don't have to really sign up with Apple, I could sell my content through one of the stores. Say for example Amazon has a store in Apple App Mall, I could sell my content through Amazon and Amazon might just charge me something like 20% or less because they get a good from Apple for having a big store with years of commitment and that way publisher can really gain a bit because that would be way less than 30% of Apple's charge.
        Ram U
  • Oh god...

    ...this is not a good idea. What a bunch of rambling nonsense.
    james347
    • RE: Apple's future: leasing space in App Malls

      @james347 Details.
      jperlow
      • Well, we can start with the fact that

        you don't run a company that makes billions per quarter in profit. Then we can follow up with the fact that you don't understand the App store business model, which is consumer and not developer-focused. Then we can finish up with you not realizing that 30% is actually a pretty standard commission. Then, we can put on a dollop of you didn't have this outrage when Amazon was taking SEVENTY percent from its content providers.
        fr_gough
      • How about the fact ...

        @jperlow

        ... that if 30% fees for content providers really are too high and it actually does drive away important content, Apple will simply lower the rate in response and not have to go through the added headache of creating and maintain two different App Store monetization schemes?
        RationalGuy
  • RE: Apple's future: leasing space in App Malls

    Jason,
    I hate this model. Our economy has fallen because of this same type model. The rich kids patting each other on the back. The big rich boys get a "big store front", where as the little poor guy may or may not get any name recognition or space on this dream mall. Apple just needs to tag an ad on all apps and quit being so damn greedy. My note to all app developers small or large don't sale yourself short with Apple. The new Google business structure is just around corner it will become the most dominant mobile experience in every category. 350,000 Android devices activated daily. So don't worry, you will make a lot of money.
    barrydenton
    • RE: Apple's future: leasing space in App Malls

      @barrydenton If you think that a small vendor should be treated the same as a large vendor who is willing to put in a significant financial commitment to employ other people and bring in a substantial amount of commerce, then I disagree. This is capitalism.
      jperlow
    • RE: Apple's future: leasing space in App Malls

      @barrydenton [i]So don't worry, you will make a lot of money.[/i]

      Yet the average income for developers in the Android Marketplace is vastly lower than that of developers in the App Store. Regardless of what the "store" or "mall" wants to charge, you have to have customers that are willing to spend their money if you want to make any.
      non-biased
  • RE: Apple's future: leasing space in App Malls

    Apple didn't get where they are by listening to you.
    trm1945
    • RE: Apple's future: leasing space in App Malls

      @trm1945 that if 30% fees for content providers really are too high and it actually does drive away important content, Apple will simply lower the rate in response and not have to go through the added headache of creating and maintain two different App Store monetization schemes? <a href="http://www.thesanfranciscomovers.com">mover san francisco</a>
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  • RE: Apple's future: leasing space in App Malls

    There already is an App mall. It's called the internet.
    Goldie07