ARCHIVES: This is legacy content from before Marketing Dive acquired Mobile Marketer in early 2017. Some information, such as publication dates, may not have migrated over. Check out the new Marketing Dive site for the latest marketing news.

Will US government crack down on Apple for antitrust violations?

With the Justice Department and Federal Trade Commission scrutinizing Apple?s new subscription service and Google announcing one much more favorable to publishers and content providers, Apple may have gone too far this time.

Apple has signed agreements with magazine titles such as Hachette Filipacchi?s Elle and Bonnier?s Popular Science, signaling that some publishers will be willing to cough up 30 percent of their revenues to the maker of the iPod, iPhone and iPad. However, even if Apple is able to avoid antitrust litigation, its battle for control of the mobile consumer is just getting started.

?This topic is important to mobile payments?I think Apple is clearly trying to set a precedent with this,? said David Schropfer, author of ?The Smartphone Wallet? and partner at The Luciano Group, Red Bank, NJ. ?The dual issue here is its 30 percent commission, which is extraordinarily high, and most favored nation agreements, which is a term you do not generally see in the world of retail and reselling digital content.

?Apple is testing whether they can sustain the ownership of a customer just because it makes the hardware and writes the operating system of the iPhone,? he said. ?This is a significant problem that is going to happen again and again in mobile payments?who owns the customer?

?All of the parties involved are going to try.?

Tug of war
In the case of mobile payments, the carriers are involved, the handset manufacturers and OS creators are involved and the publishers and content providers are involved, not to mention payment processors and financial services institutions.

All of these various players are trying to stake a claim on the consumer.

Apple is making the first move to set the precedent that the handset manufacturer and operating system producer, in this case Apple, can claim ownership of the customer and make money on these sales.

?My personal opinion is no, it would not rise to the level of an antitrust issue, although it does seem anticompetitive,? Mr. Schropfer said.

?Most favored nation means that a seller wants to make sure consumers cannot get a better price elsewhere, but when you have a price that could vary but a commission that does not vary, that certainly becomes anticompetitive,? he said.

In this scenario, if a digital media company happened to sell their product at a discount for any reason at all, say, for a large volume sale or as part of a yearly subscription package, that digital media company would be forced to sell at the same price that it sells to an individual iPhone user.

That could represent a deep discount.

?If a retailer is cutting their profits, maybe Apple should share in shouldering that, but they didn?t,? Mr. Schropfer said. ?They are forcing the entire margin loss on the seller of the digital good, not splitting it between both parties, which is an aggressive position.

?All of the companies that play a role in the mobile payments ecosystem, including Apple and Google, want to lay a claim to the ownership of the customer, because they can make a profit whenever something is sold to the customer,? he said. ?Google is an entirely cloud-based service, putting Apple and Google in very different camps, but if they are all trying to get a cut of the sales coming through their products, it is not going to work.

?They are trying to get ahead of the game, lay claim to the customer and position themselves for what?s to come in the mobile payments arena.?

Grounds for antitrust suit?
In addition to potential problems with the Justice Department and FTC, the European Commission, the European Union's executive arm, is ?carefully monitoring the situation,? according to a Wall Street Journal report.

Just because a policy may be an unfair business practice, at least according to some, it does not mean that it constitutes a breach of antitrust legislation.

While media companies consider the impact of Apple?s new subscription mechanism for apps, antitrust authorities are considering whether Apple has broken the law.

Two issues stand out: whether Apple owns enough of a dominant position in the relevant market to unlawfully keep competitors out, and whether it is exerting anticompetitive pressures on price. 

The first step to make that determination is to define the relevant market ? is the market the limited to smartphones, the tablet market or is it all digital content delivery?

Apple may have a large market share in the delivery of music, but Apple?s smartphone market share reportedly is only 16 percent. 

?A case against Apple?s rules in a market in which Apple does not have a dominant position creates issues for those wanting to sue Apple for its new rules,? said W. Joseph Price, senior associate at Kelley Drye & Warren LLP, Washington.

?And defining the right market is particularly difficult in the technology sector that is prone to constant evolution, swift changes and the constant promise of new competitors,? he said.

Google, for example, recently launched its own subscription service with terms more favorable for media companies.

And even where Apple has a large market share ? for example, about three-quarters of worldwide tablet-computer sales ? competitors are lining up products.

But that does not mean there isn?t thin ice where Apple is treading.

?Although it is possible to exclude competitors in ways that are anticompetitive or illegal, antirust agencies are increasingly curious about exclusionary conduct,? Mr. Price said.

The Justice Department recently sued a Michigan health-insurance company for allegedly using ?most favored nation? clauses to combat rivals.

That case is somewhat unusual and is relevant to dominant insurance carriers, as well as dominant companies in other industries, per Mr. Price.

?One thing is for sure, Apple has seen this before and we are likely to see more similar investigations,? Mr. Price said. ?In fact, the antitrust agencies might not be investigating with an eye toward suing.

?They will go to court, no doubt, if they see something ripe, but they might also be simply investigating, learning more about the industry, and then close the investigation if Apple tweaks its policies, or walk away of it doesn?t see any issue,? he said.

That has happened a number of times to Apple already.

Two antitrust investigations reportedly ended in September 2010 when Apple addressed issues raised by the Justice Department regarding terms in its music download business and an FTC investigation into Apple?s rules that prevent app developers from using tools made by software maker Adobe Inc. and restrictions that appeared to impede Google's ability to effectively serve ads on Apple devices.

Apple also faced government scrutiny in 2009 when the Federal Communications Commission started an inquiry into Apple?s rejection of Google?s voice app for the iPhone.

Each investigation has its own story and is heavily fact-dependent, per Mr. Price.

From a legal perspective, it would seem that there are some pretty strong defenses here to an antitrust claim, according to some legal experts.

?First of all, it is not a monopoly?there is competition out there,? said Linda Goldstein, partner at Manatt, Phelps & Phillips LLP, New York. ?It is not that unusual when a company has a new technology like this that they have invested a tremendous amount in to want to take steps to protect the reliability of the platform, which is certainly one of the rationales Apple has given for imposing these restrictions.

?It is raising some interesting, novel issues, but with respect to the antitrust aspect, it would seems that Apple has a number of pretty strong defenses, such as competition with Google?s Android,? he said. ?That?s part of the competitive landscape.

?It does not appear it would violate the various antitrust laws, unless they are engaged in something like horizontal price fixing among the various app developers?we don?t know if this is mandatory or suggested.?

Final Take
Terry McDonell, group editor of Sports Illustrated at Time Inc.