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Should apps convert to subscription model as Apple, Google rethink revenue sharing?

There could be a move away from paid downloads and in-application purchases as Apple and Google both sweeten the pot for subscription models, but whether or not this will be enough to attract premium content providers such as HBO is unclear. 

The shift in strategy is meant to encourage paid content brands to offer subscriptions via their apps, which some have been relocated to do because of the 70/30 revenue split requirement. However, other brands are likely to start exploring if it is makes financial sense to evolve to a subscription model. 

?This is an attempt to make the economics attractive enough that the paid content brands ? e.g. Hulu and HBO ? allow users to manage their subscriptions through the app stores ? the math will essentially be what is the potential lift in buyers vs. the 15 percent cost,? said Tobias Dengel, CEO of WillowTree. ?We believe there will be lots of testing and experimentation, but not sure it's enough to move the needle.?

App revenues
Today, most apps are offered free with in-app purchases or with a one-time paid download fee. 

Apple and Google have had a hard time convincing large paid content brands to put their pay walls for content within the app stores. Instead, these brands typically have their subscriptions on their Web sites and their apps are free. This means Apple and Google are not generating any revenue as mobile views of premium content continue to grow. 

The news also points to how, as the mobile space matures, both Google and Apple are looking for ways to develop steady, predictable revenue streams. 

Apple leapt first, saying it will begin taking only a 15 percent cut for subscription services in the Apple App Store while apps with a one-time paid download or freemium model will still be required to share 30 percent of revenues with the technology company. 

Publishers will be able to benefit from the better terms after users have been subscribed for a year.

Apple will also begin showing search ads in the App Store before the end of the year.

Google quickly followed suit, sweetening the deal even more. Developers will soon be able to take advantage of the 85/15 revenue split for subscription apps without the 12-month threshold. 

Game developers benefit
These developments could produce a significant windfall for games publishers who offer subscriptions. This extra revenue is likely to be reinvested in marketing on Facebook. 

?We don't think this will be a huge impact on the large majority of independent app developers, as their economics are primarily driven by number of downloads, but for large publishers of paid content ? e.g. games ? it has a huge impact and will allow them to ramp up their marketing spend, thereby putting even more pressure on small developers,? Mr. Dengel said. 

With improved margins plus more customer acquisition tools such as search in the Apple App Store, some paid content marketers are likely to consider moving the whole customer experience into app stores, from discovery to payment and usage.  

?The 15 percent cut for Apple and Google makes it much more attractive from a balance sheet point of view,? said Adam Fingerman, chief experience officer and cofounder at ArcTouch. ?The cost of acquisition through the app store is reduced and the customer lifetime value theoretically increases. 

?Of course, there?s still a big difference between Apple and Google,? he said. ?In year one, Apple still takes a 30 percent cut vs. Google?s 15 percent cut, so in essence businesses need to bank on the fact that retention will be high enough on iOS to get paying customers into that more lucrative second year.?

The new revenue sharing model brings Apple and Google more in line with what is happening on other ecommerce channels. For example, Amazon takes a 15 percent commission for online sales. 
 
For marketers, these developments offer an opportunity to rethink how they package their apps in the app store. 
 
?Would you be better off selling a one-off download for $10, or charging your user $1 a month to subscribe,? said Mr. Fingerman. ?The answer, of course, depends on what it costs to maintain your app along with what it costs to acquire that customer. 

?But we expect a lot more apps will eventually convert to a subscription model,? he said.