The Danger of Playing in Apple’s Walled Garden

Every so often a news item comes along that reinforces the downside of building your business on someone else’s platform, and this week’s poster child is iFlowReader, an e-book app for the iPhone (s aapl)¬†and iPad. The company behind the app announced Wednesday that it’s shutting its doors for good, and it puts the blame for its demise squarely on Apple and its new 30-percent levy on in-app sales. The benefits of getting into bed with Apple are obvious: access to a huge universe of motivated users and built-in payment handling. But the downsides for those who play inside Apple’s walled garden should be just as obvious — namely, you lose control over some fundamental aspects of your business.

The bitterness that iFlowReader feels about Apple suddenly changing the rules of the app game spills out of every line in the company’s blog post, in which the company advises users that it will be “going out of business” as of May 31, and that this is a “sad day for innovation.” The post goes on to say that:

Apple is giving us the boot by making it financially impossible for us to survive. They want all of the eBook business on iOS and since they have the unilateral power to get it, we are out of business and the iFlow Reader is dead. We put our faith in Apple and they screwed us.

The company notes that one of the other culprits in its financial demise was the “agency model” that many book publishers have adopted for sales, which gives the publisher the right to set the price for their e-books, and gives any seller (such as iFlowReader) a flat, 30-percent commission. The rise of the agency model is also primarily Apple’s doing, since offering that model to publishers was a competitive move against Amazon (s amzn) and the dominant position it had in the e-book market.

The combination of the agency model and Apple’s 30-percent fee on in-app transactions made it financially impossible for iFlowReader to survive, the company says, since the 30-percent charge “is all of our gross [profit] margin and then some.” And the founders — who say they spent more than a million dollars developing the app — also allege that Apple knew it would eventually kill iFlowReader’s business model, even while it was approving the application for sale in the Apple store.

Apple can change the rules at any time and they did. Sadly they must have known full well that they were going to do this. Apple’s iBooks was already in development when we talked to them and they certainly must have known that their future plans would doom us to failure no matter how good our product was. We never really had a chance.

Apple is hardly the only company that has destabilized or even killed a startup’s business model by making such changes: Another e-book player, the Lendle book-sharing service, got a nasty shock recently when Amazon suddenly changed the terms of its API and the service stopped functioning. And Twitter has also raised the ire of developers by enforcing restrictions on the use of its data and shutting down certain apps. But no one controls the purse strings of a startup’s business quite like Apple does when you enter the App Store.

As some observers have pointed out, iFlowReader would still be alive if it had also developed an HTML5 version of its service for the open web, rather than putting all of its eggs into Apple’s basket. But the lure of the iOS platform is great. The iPhone and iPad are huge growth engines, and apps that can tap into that have become massively successful almost overnight. Unfortunately, as media companies of all kinds have discovered, that kind of potential success comes at a great price, which is why some publishers such as Fortune (s twx) are experimenting with web-based services instead of just apps.

Would iFlowReader have failed even without Apple’s new fees? Perhaps. But the fact that the company changed the rules for content-based app makers so dramatically probably pushed it over the edge, and theoretically it could do the same to anyone. That’s just the nature of playing Apple’s game — the house always wins.

Post and thumbnail photos courtesy of Flickr user Giuseppe Bognanni