GoKawiilAs part of Apple’s 50th anniversary celebrations yesterday, Eddy Cue, Apple’s senior vice president of services and health, appeared on the TBPN, “Technology’s Daily Show”, podcast.
Cue discussed a wide range of topics during the interview, including a fascinating look at how Apple managed to make money selling songs on iTunes for $0.99.
Essentially, Cue explains that in order to offset credit card fees, Apple would batch song purchases and only charge your card once. Here’s Cue’s full explanation:
“There were two keys to $0.99 that we really believed in, and people didn’t see. Number one is when the price is $0.99, and it’s consistent, you never have to think about price. The second thing was that people could never do that, because at $0.99, if you’re charging a credit card, you would lose money. Credit cards have a fixed fee and a percentage that you pay. The fixed fee and percentage on a $0.99 song was like a quarter, and the vast majority of the rest of the money went to the labels. So every time we’d sell a song, we’d lose money. Nobody wanted to do that. What we decided to do — and it was a huge discussion, because we would lose a ton of money — was: ‘Look, this thing is amazing. You’re not going to buy just one song, you’re going to buy a lot of songs.’ ‘And when you do that, instead of closing the transaction on every single one, why don’t we just combine them over a period of time? Let’s keep the transaction open — call it 24 hours, or 8 hours. Everything you buy, we’ll give you, then we’ll charge you at the end.’ And that’s exactly what happened. Very few transactions were just $0.99. Most were multiple dollars, and the fixed fee didn’t matter.”
This is something Apple still does today for App Store purchases and other subscriptions. For example, if you have two subscriptions renewing in a similar timeframe, it will batch those subscriptions so your card is only charged once and Apple only pays the “swipe” fee once. The same goes for all App Store purchases and in-app purchases.
If you make an App Store purchase for $5, you might notice the charge on your credit card is for $15. That’s because Apple might’ve batched that App Store purchase with your monthly subscription for Apple Music.
From a business perspective, it makes total sense. From a user experience perspective, it can be a bit frustrating trying to figure out what each charge on your credit card is. Apple does do a good job sending receipts, but credit card charge and the receipt arrive at two different times so it can be tricky to retroactively balance things.
This leads to the impression, and the viral meme, that Apple just “randomly” charges your card every month. It’s not random, there’s a method behind the madness, but it does feel that way sometimes.
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