UPDATE 5-Apple subscription service challenges publishers

Tue Feb 15, 2011 2:26pm EST

* Apple to keep 30 pct share of sales within App Store

* Customer can choose to supply information to publishers

* Publishers must offer same terms on website, in store

* Publishers must comply with new rules by June 30 (Adds deadline, New York Times comment)

By Paul Thomasch

NEW YORK, Feb 15 (Reuters) - Apple Inc (AAPL.O) is launching a long-awaited subscription service for magazines, newspapers, videos and music -- a move that could dent the fortunes of successful services such as Netflix and Hulu.

Apple's service allows it to keep 30 percent of customer payments to any publisher with a presence in its App Store, including blue-chip brands such as The New York Times (NYT.N), Netflix Inc. (NFLX.O) or Rhapsody, the popular music service.

Publishers can set the price and length of a subscription. They can also offer subscriptions through their own existing websites, but would be required to offer those same terms to anyone signing up through Apple.

In other words, customers who want to sign up for a Netflix video account would have two choices: They could do so through the Netflix website, in which case Netflix would keep the full fee; or they could subscribe through the applications in their iPhone or iPad, which would cost Netflix 30 percent its fees.

In launching the service, Apple is taking yet another bold step in securing a major role for itself in the future of digital media. Until now, Apple has invited media companies such as Netflix or Hulu, another video service, to create applications for its devices without taking a financial cut.

Shares of Netflix, which were downgraded on Tuesday by Morgan Stanley based on valuation, were trading down about 3 percent on Nasdaq. Apple shares were down slightly.

Across the media business, there has long been some concern about turning over too much power to Apple, with the lessons of the music industry still fresh in many executives' minds.

Whether Apple's new rules will drive media companies to concentrate more on developing apps for alternative tablets and smartphones, such as those powered by Google Inc's (GOOG.O) less restrictive mobile operating system, remains to be seen.

"This is Apple flexing its muscles and trying to leverage not just the strength of the iPad and application environment, but also iTunes payment ecosystem," said Oppenheimer analyst Yair Reiner. "Over time this risks angering content developers and application developers and pushing them a bit to find other solutions."

Apple will give publishers until June 30 to comply with the new rules.

The subscription service is a major break from the previous practice of "newsstand sales" under which each issue of a magazine, for instance, would be bought separately. Apple also takes a cut of sales fee in those cases.

"When Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing," Apple Chief Executive Steve Jobs said in a prepared statement. Jobs is currently on leave.

Not every media company has as much to lose under Apple's plan. Newspaper and magazine companies are betting that the simplicity of Apple's system will help boost flagging sales, offsetting any losses they may suffer by sharing revenue.

The New York Times currently has a free iPad app in the iTunes store though it is only a selection of articles and content. That could change shortly when the newspaper plans to start charging for some of its content at its flagship site NYTimes.com and for its apps.

"We are working with Apple to understand how this impacts our plans, if at all," said New York Times spokeswoman Eileen Murphy.

For newspaper and magazine companies, one of the main sticking points in working out agreements for a subscription service has been the question of customer data. Apple's current plan will allow customers to decide how much information to supply publishers when they sign up for subscriptions.

How that information is be used will then be decided by the publishers -- who are particularly protective of subscriber data such as names, addresses and credit cards because it helps them court advertisers and market new products to existing readers.

Magazine and newspaper publishers are working with other tablet devices and smartphone makers. For instance, Sports Illustrated, which is published under Time Warner Inc's (TWX.N) magazine division Time Inc, recently unveiled an "all access" subscription program for Google's Android-operated tablet computers and smartphones.

The decision to broadly introduce a subscription service comes just weeks after Apple teamed up with News Corp NSWA.O to launch The Daily, which was the first subscription product available through Apple's iTunes store [ID:nN01120497]

Netflix shares fell $6.99, or 2.8 percent, to $240.57. Apple's shares fell 30 cents to $358.88. (Additional reporting by Gabriel Madway in San Francisco and Jennifer Saba in New York; Editing by Gerald E. McCormick, Maureen Bavdek, Dave Zimmerman)

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