Apple, the App Store, and antitrust (FAQ)

Federal regulators are discussing whether to launch an official probe into possible anticompetitive practices by Apple. CNET outlines the issues.

Apple may be the latest tech company to be in federal trustbusters' crosshairs.

Changes to the company's developer agreement have prompted both the Federal Trade Commission and the Department of Justice to consider whether Apple might be unfairly squeezing out competitors. Both the restrictions on programming languages used to create iPhone apps and the way it plans to use data from its new iAd platform are at issue.

No formal charges have been filed, and there are plenty of open questions regarding what could happen to Apple. Here are some frequently asked questions regarding a potential antitrust investigation.

Why Apple?
When Apple updated the agreement for developers who create applications for the iPhone and iPod Touch, John Gruber of Daring Fireball noticed the change in the software development kit license for iPhone OS 4. It now says: "Applications must be originally written in Objective-C, C, C++, or JavaScript as executed by the iPhone OS WebKit engine, and only code written in C, C++, and Objective-C may compile and directly link against the Documented APIs (e.g., Applications that link to Documented APIs through an intermediary translation or compatibility layer or tool are prohibited)."

It would seem to preclude using other platforms that allow developers to make one application that runs on multiple devices--for example, not just on Apple's iPhone, but on their competitors' devices as well. Adobe's Flash platform and Novell's MonoTouch are both developer tools that fall into this category.

Also at issue, according to The Wall Street Journal, is the way Apple will handle the data it collects in its new advertising platform for developers, called iAd. iAd is a new part of iPhone OS 4, and will allow developers to insert ads directly into their applications. Apple's agreement with developers doesn't allow analytical data to be transmitted from their applications. iAd's competitors have reportedly complained that the policy stifles competition by not allowing competing ad networks to know how they should target their own ads.

Does this explain  Steve Jobs' letter  laying out his company's problems with Flash last week?
It could. Jobs' defensive letter did seem a little out of the blue, but the  Adobe vs. Apple story has been heating up lately. Jobs has called Flash a buggy resource hog, and Adobe has accused Apple's ecosystem of being  overly restrictive and arbitrary . Regulators poking around behind the scene could have prompted Jobs to go public with his concerns as a public relations strategy.

Apple's share of the smartphone market is still relatively small. Why would the government have antitrust concerns right now?
Apple's relative size of the smartphone market is indeed small. iPhone OS accounts for 14.4 percent of mobile operating systems in use worldwide as of the end of 2009, according to Gartner. That pales in comparison to Symbian, which leads with a 46.9 percent share, and Research In Motion, with 19.9 percent. But Apple's App Store, which is accessible on the iPhone, iPod Touch, and now the iPad is clearly a force to be reckoned with. There are 4 billion apps downloaded, and there are 185,000 for sale, as of early April. That number is expected to grow with the launch of an expected new iPhone in June or July.

"If you wait until someone already has a monopoly it's too late. Then you have to break them up, and we know how well that goes."
--Jason Schultz, co-director, Samuelson Law, Technology & Public Policy Clinic

In other words, its influence is growing. Regulators usually like to get out in front of these things, asking questions now, looking at potential future issues before it's too late. "Timing is everything" in trying to prevent monopolies from forming in the first place, according to Jason Schultz, co-director of the Samuelson Law, Technology & Public Policy Clinic at University of California at Berkeley.

"If you wait until someone already has a monopoly it's too late. Then you have to break them up, and we know how well that goes," he said. "It's not good to wait until someone has lock-in." In other words, until a company uses legal or technological means to ensure consumers are "locked in" to a certain product.

And while having influence isn't necessarily a bad thing in a market, regulators will often look at whether a company is creating a too-high barrier of entry to a market for other companies. As in, how hard would it be for a competitor to make a similar product? And how much would it cost for a customer to switch over from Apple's mobile ecosystem to another company, for instance, Google's Android?

Cost can mean both convenience and money. If customers buy several Apple devices, download applications, and put a bunch of their personal data on those devices and Apple then makes it impossible to allow those customers to use their own data on another device of their choice, regulators may feel they need to step in.

"If (the process to switch to a competing product is) reasonable that's no problem," said Schultz. "If Apple is making it harder for people to switch that's where (regulators) might express concern."

When those two agencies are having "discussions," as has been reported, what does that mean?
Whenever there's an antitrust issue, the two agencies negotiate who will take the case. Traditionally the FTC has been more concerned with mergers and the acquisition of companies, and the Justice Department has been more concerned with contractual lock-in issues. In the case of Microsoft, it was the Justice Department that took action. It's hard to predict.

It's Apple's platform. Why can't it pick what programming languages can be used on its own App Store?
The question is whether Apple has enough market power to force people to play by its rules. The federal government will be concerned about whether there will be a healthy market for platforms or other applications outside of the Apple system and whether consumers will be able to switch over to those platforms or markets easily enough to create competition between Apple and the other platforms, according to Schultz.

The question being asked is similar to what was asked in the Microsoft antitrust case, though there's no comparison in terms of market share. Microsoft then had over 90 percent of the desktop OS market, while Apple has 14.4 percent of mobile operating systems as of the end of 2009. But, if Apple is, in fact, forcing App Store developers to agree not to program or distribute their apps on any other systems or platforms, that is similar to Microsoft's attempt to force computer manufacturers to pre-install only Windows and other Microsoft products.

"It is the attempt to use power in one market--smartphone/tablet applications--to control other software markets, much like Microsoft used its power in the operating system and office software markets to try to control the browser market," according to Schultz. "Just as OEMs would have been foolish to refuse to do business with Microsoft, most smartphone/tablet application makers would be foolish to refuse to do business with Apple if they hope to survive. Thus, this could be a basis for FTC/DOJ inquiry."

 

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