Are free digital content apps a free ride on Apple? How to move forward

Sony Reader. Amazon Kindle. Rhapsody. In the App Store, they all have (or would have, if Sony's app had been approved) one thing in common: they're represented by free apps that serve as profitable storefronts to their digital content. They all pay their $99/year entrance fee to the App Store, but once in, they're not sharing their extensive off-store revenue systems with Apple.

Apple provides the infrastructure, the delivery mechanism and the customer support for millions of free applications. And now, at least for those free apps that lead to digital goods sales, Apple is asking for a slice of the pie beyond the utility and attention that free apps bring.

In a move that has Rhapsody ready to pull its offerings from the App Store, Apple has demanded that providers who offer subscription content outside of App Store channels now offer the same subscriptions within the applications as well. Meanwhile, even non-subscription purchases may be coming under the App Store umbrella.

That would involve a 30 percent cut for all in-app subscriptions and media buys for Apple (which makes Apple's accountants happy), as well as an insane amount of overhead to approve each and every in-app purchase item (imagine what it will take to code, submit and oversee not just Rhapsody's once-a-month charge but every e-book in Amazon's catalog).

This is obviously a chest-beating move on Apple's part, not a clear path to go forward. The conflicts with content vendors are going to get louder and more strident if this approach is maintained, and users may not be happy with the end results.

So, how can Apple change-up its system to get a fairer (for Apple definitions of "fairer," not necessarily yours, mine or Sony's) slice of those free-but-commercially-motivated apps?

Here are a few ideas, none of which warm my heart personally as a developer, but which might help walk a better middle line as far as Apple is concerned.

Mandated iAds. Apple continues to develop its iAd strategy, recently introducing interstitial ads that can play between game levels to its other ad-based offerings. iAds haven't been an unquestionable hit in the App Store developer community to date, due to their mixed results and fill rates, but enforcing an iAd policy for bigger apps could provide a revenue stream without forcing products out of the App Store.

After a free application reaches a certain popularity level, they could be strongly "encouraged" to either add advertisements or opt out through cash payments.

Forcing iAd compliance could also be a great boon to developers who have free apps that they're not monetizing. Many apps that pre-date iAds never added in ad support because of perceived customer distaste. "Apple forced me to do it," could be a big win for developers and Apple -- if not for currently satisfied end users. It would also add a big impetus to improve existing applications that have otherwise languished as abandon-ware because of their lack of revenue.

The big loser here would be Google/AdMob and other similar vendors who would be displaced by a policy that seems anti-competitive on its surface.

Scaled placement costs. If you're shipping millions of apps with external revenue channels, maybe Apple will request a referral fee beyond the $99/year developer license. This would still cut into developer revenues, but it might not force, for example, Rhapsody to bail. Something higher than 0 percent but way lower than 30 percent could be a feasible path for Apple and these third parties.

Think of it as a finder's fee for Apple, for directing extra revenue to the right location, rather than a direct revenue cut. The costs would scale based on how much revenue Apple funnels to the provider. This is a model that Amazon already provides, via its associates program, and one that's most likely to be adaptable to a wide variety of big vendors.

Shifted costs. It's not just about free versus paid applications. Every $0.99 app sends approximately $0.29 in Apple's direction. In contrast, every $14.99 in-app purchase sends about four and a half dollars. In the solution that I hate the most, perhaps Apple will start charging developers of free catalog/digital goods apps directly for each free app they send out. Maybe a dollar or two per app beyond, say, a million apps sold that are iAd-free, to offset lost revenue for off-site sales.

For big vendors like Sony, Amazon and Rhapsody, this is possibly a solution that would work well, because it's based on apps shipped rather than revenue earned. Once you're past that initial cost, the revenue stream remains unaffected.

For small time developers, it's basically the kiss of death if their off-site revenues are not robust enough to support the costs. Still, with a big enough cushion number, it could balance the big devs against the smaller ones -- unless you've written something completely free and popular as a front-end to a digital store that isn't yet making you lots of dough to compensate for the bite of the Apple.

While this approach would not tie Apple's revenues into direct sales numbers, it could provide enough income to balance the costs Apple incurs on behalf of these outside vendors.

What do you think? How can Apple cash in on digital storefronts without killing the vendors who provide them? Let us know in the comments.