Original URL: http://www.theregister.co.uk/2010/06/17/apple_antitrust/

Apple not yet dominant enough for anti-trust action

Safe to act like a spoiled child for now?

By Faultline

Posted in Financial News, 17th June 2010 14:37 GMT

Opinion Apple is rapidly becoming an anti-trust target and right now it is behaving like a badly spoiled child with respect to what it will allow and not allow on any of its platforms. This is reflected in decisions to keep Adobe and any other development environment off its devices, and more recently in its proposed new developer terms which will stop developers from working with Google and AdMob on advertising.

Apple has brought in new App Store rules which prohibit third-party agencies collecting usage data from iPhone Apps, and this is clearly aimed at stopping advertising networks reporting back to ad buyers.

As a result Apple is likely to face an antitrust probe into the terms and conditions of its new iAd mobile advertising network, based on technology it acquired with Quattro Wireless earlier this year. The US Federal Trade Commission will lead the investigation to determine if iAd unfairly restricts competitors from targeting the iPhone/iPad. It is the nature of any company which has recently become dominant, that it appears to make deliberate moves, which would previously have been legally perfectly okay, which are now illegal. It always appears to outsiders that such companies are deliberately provoking the authorities so that they are forced to act. It’s as if the company is asking the authorities to tell it just how far it can go. Apple is asking the question: “How far can we go, what can we get away with?”

We have written at great length about anti-trust over the years, from the changes wrought in IBM’s behavior in the first half of the 80s, to the European-imposed fines placed on Microsoft, and now Intel, in the current decade, as well as abortive attempts against Qualcomm. Usually the companies involved continue to infringe long after they are aware of just how far it is reasonable to go and Microsoft became a serial infringer, repeatedly placing conditions on its distributors and OEMs around the world which shut out rivals such as RealNetworks and Sun.

There are three costs to look out for. The first is minimal - the fines from some competition authority or other, usually the Competition Commission in Europe. It’s usually down to Europe, because in the US, where it has almost identical anti-trust provisions (indeed we understand that European Law on this subject was formed from the US laws) it rarely acts. That’s because the collective US corporate mind applauds monopoly and its lovely investor benefits of continued and consistent dividends. But even Europe rarely breaks the $1bn barrier when imposing a fine. It’s more important that the second cost is imposed, and that’s behavioral change.

Any anti-trust authority gets most benefit for its consumers by making sure that companies like Apple, with any element of dominance, cannot dictate market pricing, cannot impose inappropriate technical standards, and cannot force the various routes to market, to ignore rivals.

Once that’s changed, and the behavior usually involves exclusivity clauses in contracts, or in Apple’s case prohibitive closed DRM (no matter what Apple says about DRM-free content, it still operates a closed DRM), or open and stable terms, then competitors at least have an even chance, and regulators get out of the way. These changed behaviors usually slow the juggernaut, but not to a standstill.

It is the third cost that slows monopolies to a standstill, and that’s the self-imposed “do no more anti-trust” edicts that often run throughout a company after getting stung with a major fine. At IBM the imposition of a group called “Business Practices,” came to have a reputation something akin to the German SS, but perhaps behaved more like the DIA in the US police force. It ate its own. The theory was that nothing could be more beneficial to the company than avoiding another anti-trust suit, so internal business proposals were crushed out of hand, if they ignored any element of business practices.

It is the collective consciousness among management of such a company, having been through the wringer in court, and the harm it does to strategy throughout legal proceedings. It takes senior management’s eye off the ball.

It is this which has made Microsoft appear tame in recent years, and which has seen Apple’s market capitalization overtake Microsoft’s. But we think anti-trust accusations at Apple are rather less likely to result in any of these. First a case must be proved.

If we look at music, Apple is probably not dominant. It’s close, but higher prices are charged for music outside of online music sales, and a bulk of music revenue still comes from the physical forms of music. There will conceivably be a time, a long way into the future, when online music will become dominant and Apple may at that time be a suitable target for anti-trust. However it is possible that online music can itself be defined as a separate market, simply because of this future potential.

In which case Apple is clearly dominant. The classic figure given out is that Apple has 70 per cent of the online music market. We think this is probably an overstatement as long as you include all music subscription service revenue, advertising revenue from free streaming music service, total internet radio revenues as well as all forms of handset music revenue including ring tones.

But Microsoft was only proven to have a third of the server market, and yet it was considered dominant by the European Commission. So under that kind of market definition, Apple might have less market share than is popularly believed, but still have enough to be capable of defining market conditions. So it’s dominant in online music. It might argue that it is not dominant in digital music, but online would probably stand up as an acceptable definition.

We know that in IBM’s case in the 1980s, the European Commission actually proved that mainframe computers were a separate market from minicomputers and the freshly launched PC. Making a case that Apple is dominant on a hardware platform, such as mp3 players or computers or phones, would get nowhere. It has a fraction of the market in each of these hardware platforms, although perhaps has some dominance in portable MP3 players (although not if you count every phone with a media player).

As a result its App Store also cannot be considered dominant, because it’s a relatively new idea, so the market has not had time to settle down. Market dominance is impossible to prove in a new market. You could claim that Apple has dominance in the intelligent tablet market with the iPad. But that’s just because no one has had a chance to market anything against it yet.

So having dominance in App Stores just doesn’t cut it legally, and won’t for some time, and without dominance, forcing people out of the store or to write software the way you want them to is fine. And even if Apple was dominant in App Stores – considering the fact that it gives most of its applications away, (or rather enables other organizations to give them away) in return for nothing or for some advertising potential, means that finding it abusive of that dominant position would be complex, and anyway how is free software leading to very much market harm? There have been free software downloads for years, for instance games and print drivers (and browsers), but you can’t imagine someone bringing an anti-trust suit for print drivers.

And market dominance cannot be established by profit either. So if Apple makes more profit than Nokia, Samsung (handsets) and LG (handsets) put together but sells way fewer phones, then no one can invoke anti-trust laws. It should be self defeating – massively high margins in a market open and dominated by others.

Finally, Google is the foil which proves that Apple is not dominant. The iPhone on its own is lined up against Android and Android has spawned 30 odd phones already with more on the way. It comes with its own online App market, and will no doubt come with content, and is backed by a mobile advertising service Admob, which was shown not to be dominant, simply due to Apple’s willingness to also enter this market. Add players like Microsoft, Nokia, RIM, HP (Palm) and Samsung and you have many app markets, some with considerable advertising potential.

The more likely anti-trust problems are with Google. If it ever achieves some level of advertising dominance on the handset, over and above that which is provided by its purchase of Admob, then it will have used its dominance in search advertising and transferred it to mobile advertising – one monopoly will have spawned a second monopoly - and that’s always a real worry with antitrust campaigners.

So for the time being, if Apple does fairly obnoxious things to keep rivals out of its App Store and off its phones, then that will only have the effect of upsetting a number of developers, some of them rivals. It is fair competitiveness and at worst is short sighted.

We don’t think it has much of a case to answer based on existing Anti-trust law, and where Apple has run up against European gripes over its policies, such as independent pricing across Europe on iTunes (it charged more for tracks in the UK than the rest of Europe) it has responded by fixing its behavior rapidly and willingly. And as long as it continues to take that tack, that it is flexible once it is shown to be in breach of an actual law (rather than because it has simply upset someone) then it stands a good chance of avoiding the same anti-trust fate of Microsoft and IBM before it.

Copyright © 2010, Faultline

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