Antitrust and Apple

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Once indication of when a company has ‘made it’ is when they start to be the target of antitrust attention. A couple of years ago, Google entered that club and now Apple looks set to follow.

Apple is facing two antitrust accusations. First, there is its exclusive deal with AT&T. This was a deal inked prior to Apple even entering the phone market but we should recognise that, on its face, it hinders consumer choice. Of course, that is not the antitrust standard. The question is whether it damages competition. Now normally an exclusive deal can do that by allowing one firm to extend its monopoly position into related markets — in this case, it would be Apple and AT&T locking up the iPhone so that other networks will be driven from the market. Notice that it isn’t about other phone makers being driven from the market as AT&T still sells other phones — so exclusivity is one-sided. Now AT&T’s market share has grown but it hardly looks like other carriers will be driven out of business or crimped anytime soon. Indeed, I would say that the general consensus is that the main harm from this deal has been to Apple itself. In other countries, I suspect that the iPhone market share is much higher where there is no network locking of iPhones. The point here is that it is tough to define a market where Apple has dominance let alone a monopoly. It isn’t the mobile phone market (Nokia still is the largest). It isn’t the smart-phone market (where at least in the US Apple lags both RIM and Android-based phones). The only market it is a monopoly in is the market for iPhone. Now while I, for one, will accept no substitute, you will only need to look at the comments (I am anticipating) to see that that is not a shared view and maybe, not a widely shared view. A monopoly for a market defined so narrowly around one company is a monopoly by definition but that is hardly the standard for antitrust analysis.

The second claim is on the access to the iTunes App Store and by virtue of that access by developers to being able to sell iPhone apps. Apple controls that access and sets its own criteria — criteria that likely are not universally shared. It also appears to limit access by apps that compete with its own functions; although those functions are ones it gives away for free. Moreover, apps need to satisfy Apple’s pricing terms. But is this illegal monopolisation? The question again is what market does Apple have a monopoly or substantial market power in? The best candidate is that there is a market for application distribution and use and that Apple has a large share of that platform. Now it still lags both Android and RIM for installed base on such platforms but it does appear to have the largest revenue. But that does not necessarily equate to market power. Could Apple, for instance, raise all app prices by 5 percent and find that profitable? It is highly unlikely. While its installed base of current iDevice users would not be able to substitute out, it would face a terrible time competing for new consumers and renewals. This is probably why Apple has not done this even as its installed base has grown. But even if Apple has substantial market power here, there remains the question of its rights to set terms. One issue is that it set those terms at the beginning — well, before it had, by definition, a market, let alone market power — and it has not changed them since. It has only added features. If it took features away, at the very least, we could start to consider whether there is a case against them but that hasn’t happened and nor does it look like it is going to happen.

4 Responses to "Antitrust and Apple"
  1. Both of these issues involve vertical integration, and restrictions a company places on its suppliers or retailers rarely create any harm to competition.
    On the first issue, Apple has to decide how to offer its product to the marketplace. Apple could have chosen any other retail channel, including selling it itself. It decided to let AT&T act as the retailer, bundling it with their services. Apple has the right to exploit any monopoly power it might have from developing a product unlike any other, and this option may have lower costs than others, at least when the product was new, as bugs and incremental improvements could concentrate on one network and not many. This is no worse than Apple selling it itself and requiring that it only be used on networks that have x, y, z characteristics, which might effectively limit the consumer to the AT&T network. No harm to competition here.
    On the second issue, Apple has to decide how to construct software to be used on its new product. It decided to go to outside suppliers for some of this software, but instead of going to each supplier with detailed specs of what it wanted, it let outside suppliers come to it with software “proposals,” and Apple selected the ones it wanted to offer with its product. Apple has the incentive here to create the highest value at the lowest cost for these arrangements. No harm to competition here either.
    As a former FTC economist, neither issue would have been entertained as a potential harm to competition by either the FTC or the DOJ while I was there. Juries in federal courts sometimes do funny things, but if it keeps getting appealed, if necessary, I expect this effort fails.

  2. Nice analysis, Josh. I particularly appreciate the points about defining the market. I agree that that alone probably will keep Apple out of court for a while.
    Nonetheless, I cannot resist asking. How do you react to the changes of the last month, in which Apple has changed its developer rules? Apple has announced a series of actions designed to make it more difficult for developers to support more than one platform — Google’s, Microsoft’s, Nokia’s, or any other. The rules restrict what developers own from their applications, what they can migrate off the Apple platform, what functions they are allowed to support. A platform owner could not get away with such changes unless it had some market power with the developer community. Otherwise most developers would bolt immediately. (Look, I recognize that that this logic is not nearly enough for a court to find against Apple, but since when is that the standard for deciding between good and bad economic analysis?) I would not be so quick to dismiss these charges as harmless, particularly if you worry about the how these shape the costs for new platform entry, the costs of developing substitutes functions on existing platforms, and other competitive issues like that.
    Summary. It sure looks like there are competitive issues there. Some of the recent changes should raise eyebrows.

  3. Is it that simple gametheoryman?  I’m probably completely wide of the mark but I wonder if it is or not. 

    I’ve no idea how laws in the US treat thirdline forcing and what-not but in that US Wholefoods merger case, the FTC challenged it on the basis of a very restrictive market definition involving people obsessed with buying food from hippy establishments, and whether they would experience a sustainable price increase post-merger.

    Here, we are asked to accept a more restrictive market definition – the market for iphones rather than the market for smartphones generally, and see what happes with typing that product to AT&T and its software restrictions. 

    I don’t think you’d have to work hard to establish there is a distinct class of people who would buy iphone’s only, or find some serious price discrimination going on to extract their surplus.  Not something I personally get worried about since price discrimination is otherwise legal, but since Apple and AT&T are tying products together, the FTC or a court might well entertain it?

  4. Shane, I agree that the Court-standard isn’t the economist’s standard. And the economist in me would prefer that Apple offered a menu — their standard product with restrictions and warranty and then an official ‘opt out’ to allow other applications with an understanding that the warranty and support is consequently less. But as you know, from a legal and management position, that type of menu likely isn’t open to Apple.
    That said, if they get market power and such restrictions are allowing them to leverage that power into, say, the market for apps and development in general, then such questions of operability should be dealt with.

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