Apple's future: leasing space in App Malls

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.
Written by Jason Perlow, Senior Contributing Writer

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 yearto 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.

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