For the past few weeks, rumors have been flying around the web that Apple might begin asking content providers like Netflix or Amazon for 30% of their subscription and content sale revenue in certain situations. As you would expect, this has created quite a firestorm of outrage among users and pundits alike.

While the rumor is mostly true (more on that in a moment), it’s important to understand how Apple handles billing and developer revenue sharing on the App Store to provide some context for the current situation.

Apple does a lot of work to keep the App Store running. They maintain the servers, they pay for all the internet connectivity for those servers so people can download Apps 24/7, they provide DRM services and billing for all Apps.

For their efforts, Apple takes a 30% cut of App Store sales revenue, and developers get to keep the other 70%. If your App sells for $9.99, Apple keeps approximately $3. If your App is free, Apple still hosts it for free and they receive no revenue for doing so.

That same 70/30 split applies to in-app purchases, if you offer a $0.99 content pack add-on for an iOS game, Apple keeps approximately $0.30.

However, some applications are free to download (meaning Apple gets nothing for hosting them), but they offer access to paid content and subscription services that exist entirely outside of the iOS ecosystem. Apple doesn’t get any of that revenue either, and they’re trying to change that.

Whether Apple deserves to be paid in those situations is certainly a matter of debate, but I don’t think they do.

As I noted above, Apple does a lot of work to host Apps and maintain the App Store. They also host Apps for premium services like Netflix and Amazon for free. However, Apple does absolutely nothing to host the content for those services, they don’t maintain the servers needed to stream Netflix movies to millions of people every day, they don’t pay for the bandwidth those services use, but now they want 30% of the revenue generated by those sales.

Under the new rules, this is what will happen:

If an App provides access to content that was purchased from a website or through another device, for instance Amazon’s Kindle ecosystem, that application is now required to also offer that content for sale inside the App using Apple’s billing system, and Apple takes a 30% cut of each sale.

If an App provides access to a subscription service that exists outside the Apple ecosystem, like Netflix, then that subscription service must allow people to sign up for a new subscription inside the application using Apple’s new subscription billing system, and Apple takes a 30% cut of the subscription every month.

Apple is not forcing companies to use the App Store billing system exclusively, if a sale is completed outside the App on the Kindle website, Amazon still gets 100% of that revenue. However, companies are not allowed to encourage their users to complete a sale outside the App.

That means Amazon’s Kindle App can’t link back to the Amazon website to complete a book sale (this is what it does right now), and the Netflix App can’t tell users to visit the Netflix website to sign up for a subscription.

Amazon has until June 30th to remove that link and start using in-app purchasing while taking a 30% hit on every sale, or Apple says they will remove the Kindle App from the App Store. It’s worth noting that Amazon’s Kindle App is a (dramatically more successful) competitor to Apple’s own iBooks App and store.

I don’t like what Apple is doing here at all, and apparently neither do some of the companies this money grabbing scheme will affect.

Rhapsody, which provides an iPhone app to access its subscription music service (which also happens to be a competitor to Apple’s own iTunes store…) has already stated that they can’t afford to participate in Apple’s new “economically untenable” subscription system. They stopped short of threatening to pull out of the App Store, but they did issue a bit of a legal threat if Apple doesn’t change course.

My recommendation to companies like Netflix, Hulu, Amazon and others, who have been given until June 30th to comply with Apple’s demands: call their bluff just like Rhapsody is doing. Don’t change a thing.