Rdio attempts to survive Apple’s subscription tax

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Earlier this year, Apple Inc. dropped its time bomb on the digital music business, one that was set to explode June 30.

That was the deadline for all apps to comply with a new rule -- any subscriptions purchased through iTunes would be subject to a 30% “tax,” where Apple would claim 30 cents out of every dollar collected.


This week, the body count is in. Three music streaming services -- Rhapsody, Napster and MOG -- have stopped recruiting new users via its apps for Apple’s iPads and iPhones. Instead, their apps just ask current users to sign in. A fourth, Slacker, is considering doing the same. And Spotify, which launched in July, also does not recruit subscribers on its iOS app.

One company, however, is exploring a different path. Rdio, the San Francisco music start-up funded by Skype and Kazaa co-founders Janus Friis, Niklas Zennström, is braving its customers’ wrath by charging a higher price, $15 a month, for subscribers who come in through its iOS apps than for those who can get the same service for $10 a month by signing up via the company’s website.

The new price is being introduced Thursday, alongside the launch of Rdio’s iPad app.

Drew Larner, Rdio’s chief executive, said he understood the risks of having dual prices. But the fledgling service, which launched a year ago, was caught between a rock and a hard place.

The rock: Music labels and publishers claim roughly 60% of a streaming service’s revenue, leaving them with $4 out of every $10 they collect. Margins for start-ups such as Rdio are far less attractive because they have to spend money up-front building their technologies.

The hard place: Apple now wants 30% of subscription fees.

Back of the envelope math tells us that, on average, digital music services charging $10 a month would be left with $1 to run their businesses after Apple and music rights holders take their cuts.

Larner said charging $15 a month for an iOS customer would give Rdio the same profit margin as a Web customer paying $10 a month.

“We’re not making any more money,” Larner said. “This is simply to bear the 30% that Apple charges for the privilege of being in the iTunes store and using Apple’s in-app billing,” which lets users more easily buy without having to register or enter their credit card information.

As a result, Rdio doesn’t care where a customer signs up. In fact, customers who complain will be told they can cancel their iOS subscription, sign up on the company’s website for the lower price and pick up right where they left off in the app without missing a beat.

Apple’s fees on purchases made within iOS apps have tweaked more than just music companies. recently disabled its Kindle app’s ability to let customers buy books from within the iOS apps, telling its customers to instead use the iPad’s Safari browser to buy Kindle books from Amazon’s website. Doing so circumvents the Apple tax, which theoretically applies to subscriptions to online video as well.

It’s unclear whether Netflix, whose Instant Watch service is among the most popular uses for the iPad, received a waiver from Apple or whether it, too, must pay Apple 30% of the $7.99 a month it receives from streaming service customers.


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-- Alex Pham

Twitter/ @AlexPham