Thursday, February 17, 2011

Report: DOJ And FTC Have Antitrust Questions For Apple

According to reports from the Wall Street Journal the Justice Department and the FTC are both interested in examining whether Apple is violating U.S. antitrust laws by funneling media companies' customers into the payment system for its iTunes store—and taking their 30% cut.

Even though this sounds like bad news this new scrutiny may never materialize into anything more than a preliminary report. Both agencies threatened formal revues when Apple blocked third party development applications. Apple later eased off those restrictions leading both agencies to back down. Its likely that could happen in this case and even more likely that the government is posturing to appease the masses.

Several antitrust lawyers have chimed on the antitrust issues raised from Apple's new in app subscription policy with many stating that Apple may actually face little risk of antitrust violations.

"It would be a steep, uphill climb," Hillard Sterling, an antitrust attorney and partner with the Chicago-based law firm of Freeborn & Peters told "The challengers would have to show that Apple has precluded competition in the marketplace. But there are plenty of platforms where publishers can offer their products outside the App Store."

To make a case against Apple, antitrust enforcers would have to show that Apple has market power and is abusing it. This will all come down to how they choose to define a market. Apple's iPhone currently only has a 16% share of overall smartphone sales while the iPad currently has three-quarters of world-wide tablet-computer sales.

Apple's Control Over Their Market

It all comes down to what the goverment will consider a 'market'. To make an antitrust case, plaintiffs would have to show that the new App Store rules prevent companies from selling their content. Sterling argues, "And that's a no brainer. They can offer their products through alternatives, such as Google's Android Market."

The major problem I see, and the point that I think is continually lost, is that Apple controls everything in their market. They preclude any competition from forming since they only allow iOS and MAC OSX on Apple branded devices and only those devices can use the App store and Mac store. If developers want to share in the 'Apple Market' they have to play by Apple's rules.

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Exclusivity in and of itself isn't anti-competitive. Apple has the right to maintain control over their products as long as it doesn't hurt consumer choice or stifle competition. Apple has had a long standing position of exclusivity and has always sandboxed themselves from any outside competition. They don't allow any other company to create iOS or MAC OSX devices which quells all means of competition against them as a manufacture. The question here will be are they now using the position as not just hardware developers but software developers to create a hostile position.

Apple locks their devices to only be able to install apps through the App store and iTunes. This means they control the devices, the store and the means of distribution for hundreds of thousand of apps and millions upon millions of devices. Companies and developers not trying to work within the App store could potentially take a serious hit to business!

Apple Positions It's Software To Thrive

The second side of an antitrust inquiry could bring up the issues of tying software and creating a better environment for your software to thrive than outside competition. This is similar to what Microsoft has faced with Internet Explorer and other bundled Windows software.

Clearly Apple's own software such as iTunes, iBooks and Safari have been unfairly positioned. Apple blocks outside browsers, media players and media viewers. By this means alone they could be violating antitrust laws. Now with the "tax" on subscriptions they are putting competing content providers like Rhapsody, Sony and Amazon at a clear disadvantage.

Jon Irwin, the president of Rhapsody International Inc. has said that the new 30% fee would cut so deeply into the companies profit margins that they would no longer be able to compete.

"We have to pay rights holders, the music labels and publishers, for our content," said Irwin. "With all those fees that go out, [adding] Apple's 30% will exceed the revenue on our product. It's not a matter of making less money, it would be zero profit."

Companies like Rhapsody would be forced to raise prices in order to recoup lost revenues putting their prices significantly higher than Apple's own offerings. This would seriously hamper any competition within the App Store. Apple has maintained that users can go outside the app to buy those subscriptions although it seems clear by means of ease of use and the 'single-click sign-up option' iTunes offers iTunes would likely become the dominant means for subscribers to subscribe. This means that devs could lose out on hundreds of thousands of dollars.

Why Now After All This Time

You really have to question the timing in which Apple has chosen to enforce the subscription policy. Apple has stated the policy was already within the terms of service yet they have waited until developers have spent hundreds on development dollars, man hours and advertising revenues to bolster a position within the App store and draw customers. But its only now that Apple decided to enforce those rules.

The company has clearly benefited from the works of outside developers yet they wait until now when they have a strong position in the market to enforce their rules. This seems like strong arming and sounds very extortionistic to me. It wreaks of Apple saying we want our cut or we'll dump your app and you can kiss all those customers and advertising dollars good bye!

No I'm Not An Apple Hater!

As much as I speak out against Apple I'm not a hater. In fact I applaud them for pushing not just the PC/Tablet industry but also the smartphone industry at a time that they both were rather stagnant. I also applaud them for seeing the potential in a device (or string of devices) and doing a great marketing job. Through their actions the company has done some pretty great things to push others.

The flip-side to that is that I feel you should hold all companies equally accountable. We should not grant top tier companies the right to completely exclude competition in the way Apple does. In short terms I think turn-about should be fair play. If Apple want to push to get Safari on Windows and other OSs then shouldn't they in-turn be forced to allow IE, Firefox and Chrome on iOS.

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