Ahead of Apple's (NASDAQ:AAPL) rumored forthcoming premium news subscription service, which is expected to launch this spring, the Mac maker is already in talks with the major news publishers that would inevitably supply the bulk of the content. The company has been working hard to expand Apple News, growing its stable of content partners and bringing the service to the Mac platform late last year. Apple News also now powers financial news distribution in the Stocks app. The service is expected to be built using Texture, the subscription-based digital magazine service that the company acquired in March.
Apple even shared a new data point regarding Apple News on the last earnings call: The service now has 85 million monthly active users (MAUs) and is the biggest news app in the U.S. However, the company may now be overplaying its hand.
Apple wants half
The Wall Street Journal (subscription required) reports that Apple is running into a wall with negotiations, with the company's proposed cut central to that pushback. Apple wants to keep a whopping 50% of subscription revenue, an even higher cut compared to the 15% to 30% cut that it takes from subscription-based apps and subscriptions it sells through Apple News. The remaining 50% of subscription revenue would get aggregated into a larger shared pool, which would then be paid out to publishers based on their proportionate share of user engagement, according to the report.
Apple is expected to use a Netflix-esque model of charging a single subscription fee -- expected to be in the ballpark of $10 per month -- to grant users access to a comprehensive catalog of content, including news. Texture's subscription fee was similarly $10 per month. Among the publishers that Apple is trying to get on board are the Journal itself, The New York Times, and The Washington Post, three of the nation's most prominent news publications. They already charge anywhere from $10 to $40 per month separately.
Agreeing to license content for a $10-per-month service that bundles content would represent massive downside for those publications, while also handing over the customer relationship to Apple. It's hard to estimate how that shared pool would be allocated, as it would be dependent on engagement, but it doesn't take a Genius Bar employee to tell you that splitting up $5 per month between numerous publishers is far less than bringing in $10 to $40 per month by yourself.
That's especially true considering those publishers have been making progress transitioning to a digital world. For example, The New York Times Company (NYSE:NYT) said last week that paid digital-only subscriptions soared 27% last year to 3.4 million, representing the bulk of the 4.3 million total subscriptions that the company has. News Corp. (NASDAQ:NWSA) likewise reported a 23% jump in WSJ's average daily digital subscribers to 1.7 million in the fourth quarter. The Washington Post does not disclose subscriber figures, as it is personally owned by Jeff Bezos, but it reportedly hit 1 million paid digital-only subscriptions in late 2017.
That's too much, Apple
Apple is hoping that it can justify that value by offering greater distribution. It's probably no coincidence that the company just shared its first official data point regarding the Apple News audience, and 85 million MAUs is a lot of eyeballs, towering well above the subscriber bases of those publications.
The pitch is that publishers can offset lower per-subscriber revenue with volume. But the risk is that existing direct subscribers cancel with the publishers and sign up for the bundled service with Apple and little to no incremental subscriber growth materializes. In a worst-case scenario, Apple could inadvertently help publishers cannibalize their own subscription businesses.
The news service will be part of Apple's broader plan to grow its services business, with management predicting recently that Apple will reach 500 million paid subscriptions at some point during 2020. The company finished the fourth quarter with 360 million paid subscriptions, and has consistently been adding 30 million every quarter.
Apple has long fashioned itself a champion of the publishing industry, and there's no doubt that it has a lot to offer. But 50% is simply too much to ask.
Evan Niu, CFA owns shares of Apple and NFLX. The Motley Fool owns shares of and recommends Apple and NFLX. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends The New York Times. The Motley Fool has a disclosure policy.