Earlier this week, Apple made some waves with the announcement of its much-anticipated iOS subscription model. This model includes a set of rules and regulations surrounding how subscriptions can be offered inside apps, how they can be priced and, most importantly, how much of a cut Apple makes on each sale. In case you missed it, here’s a quick run down of the policy in question:

  • If an app is tied to a service that requires any kind of a subscription, you must be able to purchase that subscription for the same price inside the app as outside,
  • Any purchasing inside the app must use Apple’s “in-app-purchase” API (you can’t direct users to a Web browser), and
  • The in-app-purchase API comes with an automatic 30% cut of all proceeds to Apple.

Naturally, many companies have major issues with this policy. Content providers like Amazon (Kindle), Rhapsody, Netflix, and Hulu all have very popular iPhone and iPad apps that let you utilize their services, and likely none of those companies have profit margins larger than 30% on their products. Essentially, what Apple is asking means that Netflix will be required to let users of their app purchase a subscription to Netflix inside the app, and whenever someone does that Apple will get 30%. They can’t incentivize going to your browser and buying it there, because the subscription is required to be priced the same or less inside the app. They can’t even make it easy to go to the browser — users will have to find that themselves. If they don’t comply, their app will be removed from the store; It’s Apple’s way or the highway on iOS.

In-app-purchases have always come with a 30% cut to Apple, the difference now is that content providers can no longer work around it. The Kindle app used to simply redirect you to Amazon.com in your browser to do the purchasing, but now that’s no longer allowed. The only thing that app makers can do is offer in-app purchases but downplay the option in the app and hope that people just go to the Web site.

What are content providers going to do?

Obviously, content providers aren’t thrilled. The idea of giving over most or all of their profit margins to Apple isn’t exactly reasonable, but it’s not like they can just walk away — iPhones and iPads are too important, and too many people have them. Apple knows its devices are a powerful bargaining chip, and it is trying to squeeze every drop of revenue out of app developers. In an interview with TechCrunch, Rhapsody president John Irwin outlined the company’s position on the issue, which essentially is this:

Our philosophy is simple too – an Apple-imposed arrangement that requires us to pay 30 percent of our revenue to Apple, in addition to content fees that we pay to the music labels, publishers and artists, is economically untenable. The bottom line is we would not be able to offer our service through the iTunes store if subjected to Apple’s 30 percent monthly fee vs. a typical 2.5 percent credit card fee.

Rhapsody hasn’t played the pull-out card yet, but appears to be moving in that direction. It has also threatened to get lawyers involved, which seems like a losing prospect given these are Apple’s devices and Apple’s rules. Rhapsody might disagree with Apple, but that’s not Apple’s problem since what it is doing is not illegal. Don’t like it? Leave.

Amazon and Netflix have not commented on this issue, but its likely that these companies’ management feel similar to Rhapsody — the industries they are working with do not allow for large profit margins, and the slim profits they are making on the sale of books and rental of movies are not nearly large enough to be able to give almost a third to another company. Their business models will simply not survive.

It will be very interesting to see where this goes in the near future. This in-app subscription model could be great for smaller magazines, newspapers, and other people who are looking to get self-created content out there easily and have the flexibility to build the 30% cut into their business model, but for companies like Netflix who do not create their own content and are simply acting as vessels for content from large media corporations, the 30% is simply unreasonable.

Check back here for more updates on this as it unfolds.