Okay Geek Farm
How Apple destroyed the eBook business for many companies
Brandon Davenport
When you look at Apple and their book business, it’s sort of become a growth on the iOS platform. Even though it’s supposedly a huge part of their iOS ecosystem, they have gone out of their way to not mention it recently and mention of iBooks has been hidden away on the Apple website. For such a revolutionary service on such a popular range of devices in a rapidly growing (eBook) market, you might think Apple would push it a bit harder, but they aren’t. Maybe it’s because they aren’t so proud of what they’re doing…
Let’s take this back to day one and look at the situation from the eyes of a small company called iFlow Reader. In 2009 they had begun development on their breakthrough eBook reader app for iOS. For a year and a half of their lives, a team of five put all they ever had into developing iFlow Reader which included 1 million dollars of cash and sweat equity.
After finally launching their product, it was a smash hit and was deemed the best book reading app for iOS with a harty library of titles and hundreds of thousands of fans. You could purchase your favorite titles in their store, and read them in the exact same app. You could even say it was the bookstore before Apple’s bookstore, but once Apple saw that it would “impede” on Apple’s progress in the eBook market, so they decided to kill them off slowly without notifying iFlow Reader… even after iFlow reader asked them.
Why iFlow Reader was run out of business
Note: This is a piece of text un-edited from iFlow Reader’s announcement that they would be closing down their business. It’s really interesting to read about how Apple’s “Agency” eBook model works from a company that relies on it. We could have written an editorial and chopped it up, but we think this deserves to be read in it’s entierty.
The crux of the matter is that Apple is now requiring us, as well as all other ebook sellers, to give them 30% of the selling price of any ebook that we sell from our iOS app. Unfortunately, because of the “agency model” that has been adopted by the largest publishers, our gross margin on ebooks after paying the wholesaler is less than 30%, which means that we would have to take a loss on all ebooks sold. This is not a sustainable business model.
Where did the agency model come from and what is it? The agency model was created by Apple who made it a requirement for any publisher who wished to sell books through Apple’s iBooks app. The agency model has three key points:
- The publisher is now the retailer of record. The company selling the eBook to the end user is an “agent” of the retailer who receives a commission on the sale.
- All sales agents are required to sell books at the same retail price, which is set by the publisher. No one can sell at a different price.
- All sales agents get a 30% commission on the sale of a book. No one gets a different deal. Prior to the agency model, publishers typically offered retailers a 50% discount.
The key point here is that all sellers now get a 30% commission and Apple now wants a 30% fee, which is all of our gross margin and then some. The six largest publishers have now all adopted the agency model. These publishers account for nearly 90% of all ebooks sold. Random House was the last publisher to adopt the agency model, which they did on March 1 of this year. You may have noticed that all 17,000 Random House titles disappeared from our catalog on February 28. They appeared in Apple’s iBooks catalog the following day. We, as well as all other small booksellers, have yet to complete an agency agreement with Random House. Up until February 28, these were our most profitable items because we were still getting a 50% discount on these ebooks. With an eight-hour notice, all of these titles disappeared from our store as well as the stores of all other small ebook sellers.
Five of us spent nearly a year and a half of our lives and over a million dollars in cash and sweat equity developing the iFlowReader app with its unique AutoScrolling approach to reading that many of you really like. We think that our product is the best one available on iOS for reading ebooks. We had extensive plans to make it even better. We looked to the future of ebooks for inspiration while Apple and others were looking at the printed books of the past. This explains the cute, but gratuitous page turning animations, and old-timey bookshelves, which are all very amusing at first, but not very useful in the end.
We sent a letter to Apple VP Philip Schiller in September 2009 to confirm our business model. Apple told us they couldn’t guarantee anything - submit the application and they’d let us know after submission. We submitted our new iFlowReader app Apple in November of 2010 and they approved it a few days later. After approval, we made substantial additional investments in licensing fees, integration fees, and server fees so that we could open our ebook store on December 2, 2010. Two months later, Apple changed the rules and put us out of business. They now want 30% of the sale price of any books, which they know full well, is all of our profits and more. What sounds like a reasonable demand when packaged by Apple’s extraordinary public relations department is essentially an eviction notice to all ebook sellers on iOS. After over three years of developing products for iOS during which we had over six million downloads of our BeamItDown iFlowReader products, Apple is giving us the boot by making it financially impossible for us to survive. They want all of the eBook business on iOS and since they have the unilateral power to get it, we are out of business and the iFlow Reader is dead.
We put our faith in Apple and they screwed us. This happened even though we went to great lengths to clear our plans with Apple because we did not want to make this substantial investment of time and money blindly. Apple’s response to our detailed inquiries was to tell us that our plans did not infringe their rules in any way, which was true at the time, but there is one little catch. Apple can change the rules at any time and they did. Sadly they must have known full well that they were going to do this. Apple’s iBooks was already in development when we talked to them and they certainly must have known that their future plans would doom us to failure no matter how good our product was. We never really had a chance.
Quoted from this page written by the iFlow Reader staff
So what does this mean for 3rd party eBook stores?
It means that it’s next to impossible for a startup to create a successful eBook store on Apple devices. Back in the day, a 3rd party bookstore took a 30% cut (the same as Apple) and the publishers were free to be in a multitude of stores. In a split second, Apple decided wanted a 30% cut of every book sold in an iOS app regardless of where it’s sold. This left folks like iFlow Reader wondering why publishers were leaving their stores and in result of that causing 3rd party book stores to die off left and right.
In the publishers eyes, they want 70% of the sales (the whole 30/70 cut Apple promised), and if they decide to use a 3rd party store, they have to fork over another 30% of the sales (the 3rd party store needs a 30% cut as well) which totals to 60% of the sales. In the publisher world, it makes no sense to be inside a 3rd party book store, so they all flock toward the iBooks store for the meaty 70% cut of the deal and Apple reels in the dough.
Who’s fault is it?
We could blame publishers for being “greedy” and avoiding 3rd party book stores, but the real evil here is Apple. After seeing successful book stores pop up in the app store (including Amazon’s) Apple decided to squash any opportunity for them to succeed. Since Apple owns their devices and operating system, they have every right to dictate how the money flows through their ecosystem and for them, that is the biggest weapon in their arsenal against competition. If you can force entire businesses to rely on your products, you have the ability to manipulate them to help your end goal, to make boatloads of cash. This is 100% on Apple, and it’s not only morally wrong, it goes against everything they say they stand for.
“We bet everything on Apple and iOS and then Apple killed us by changing the rules in the middle of the game.” — iFlow Reader
