Do the feds have a case against Apple?

Antitrust authorities might be looking into Apple's decision to block major competitors from its mobile-ad platform. But is it warranted?

Apple iAd
Apple and its new iAd rules have put it in federal regulators' crosshairs. James Martin/CNET

News analysis Apple's tweaking of the rules for which kind of ad networks can operate on its iPhone has prompted scrutiny from antitrust authorities, according to reports.

The Financial Times on Thursday said that two sources close to the situation have "taken an interest" in  Apple's actions on Monday . Which agency would be charged with looking into it, isn't yet clear: either the Federal Trade Commission or the Department of Justice. But the FTC just spent months looking at the mobile-ad market from all angles for the recently closed Google/AdMob acquisition case , so the FTC would make sense.

The concern stems from Apple banning developers from using advertising in their iPhone applications that shares analytic data with "an advertising service provider owned by or affiliated with a developer or distributor of mobile devices, mobile operating systems or development environments other than Apple." The most prominent mobile-advertising service provider owned by or affiliated with a developer or distributor of mobile devices and mobile operating systems is AdMob, now owned by Google.

It would appear Apple is blocking a major competitor from its platform, but while still allowing plenty of other, smaller ad networks to play. 

But is that illegal? The question in these cases is always 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 ad networks outside of Apple's system and whether developers will be able to switch over to those ad networks easily enough to create competition between Apple's ad network and other ad networks.

So should Apple's actions prompt legitimate concern from regulators? It might, depending on if you look at the latest incident as isolated or part of a larger pattern, and depending on how you define the market: Apple is relatively new to mobile ads and even though the company is very visible in the overall smartphone market, it doesn't dominate it.

Apple has about 28 percent of the U.S. smartphone market according to recently released figures from Nielsen, and a similar share on the mobile ad market with iAd, which debuts in July. On Monday, Steve Jobs said Apple had  locked up $60 million in mobile ad dollars  to be spent on ads served via iAd between July and December this year. The total mobile ad spending for 2010 is expected to be worth $250 million, according to JP Morgan.

That means Apple's share of that is still relatively low, about 24 percent. However, antitrust authorities would likely define the market as much narrower, say, as "touch screen smartphones that are designed to run third-party applications." In which case, Apple would likely have a larger share. While it's hard to pinpoint, it's notable that such a definition would eliminate Research In Motion, which though it's currently the leader in the U.S. smartphone market, has mostly smartphones without touch screens. The battle over how to define a market is, perhaps predictably, one of the biggest hurdles in these cases.

AdMob is not happy , and it's easy to imagine that it was the one who put the bug in the FTC or Justice Department's ear about Apple's recent actions. Apple and Google now have a history of sniping at each other over what is turning into a  significant mobile turf war . But is being spiteful or petty, which some argue Apple is being, illegal? Of course not. But it raises the hackles of your competitors and gets them on the phone with regulators.

There isn't a larger investigation of Apple right now that we know of, but it's possible some day one could materialize. After all, this isn't the first time regulators have been prompted by competitors to check out Apple's business practices: its  digital music market share developer tools allowed on iOS , and e-book pricing have all been brought to the attention of state and federal antitrust authorities.

"It's about a series of things Apple has done, including their policies with respect to Adobe. If you connect the dots, it presents a serious enough antitrust issue that could merit some scrutiny," said Jeffrey I. Shinder, managing partner at Constantine Cannon in New York, and former special counsel to the FTC.

It's not illegal to have a monopoly, but misusing power in a market to block competition is. One way regulators could look at it is by saying "Apple is ahead and is setting up policies to entrench that lead and use it to dominate mobile advertising," Shinder said.

Apple's defense would likely be that the market is so new, there's plenty of competition, and there's no reason for regulators to get involved in a market so immature. Plus it would argue that its products are superior and that's why people are choosing them.

Apple does have many good arguments regarding the state of the market on its side, and there is no official investigation--yet. Though the company's aggression in this burgeoning market could come back to bite them in other ways, say, if Apple were to try to buy another mobile ad network. 

That would get a little extra attention from regulators. The FTC is likely to be extra sensitive to the issue right now.  One of the reasons it approved Google's purchase of AdMob  was that one of the company's biggest competitors in the mobile space was to come out with iAd, a product that would balance the playing field. What the FTC clearly didn't anticipate was Apple basically including everyone except Google.

 

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