Legislative and Regulatory Update
According to sources familiar with the matter, the FTC has been investigating Apple’s alleged anticompetitive practices in the music industry for over a year. Based on interviews with several sources following the issue closely, we have seven takeaways for the current state of play regarding the investigation:
The FTC fought with DOJ for the right to conduct the investigation.
The FTC has stopped or slowed its investigation without issuing CIDs, which is an indication that staff or the front office decided against a full review and which is unusual given how aggressively the FTC fought for the right to conduct the investigation.
Both Senate and House staffers for relevant antitrust subcommittees have held meetings with FTC staff to receive updates on the investigation, and Congressional staff have expressed concern that the FTC is not conducting a thorough investigation and is unlikely to act on the myriad allegations against Apple.
Given Congressional staff interest, stakeholders should expect hearings at some point or at least pointed questions for the FTC about the status of the investigation the next time the agency appears before Congress.
Our investigation and analysis shows that a case against Apple regarding its practices against Spotify in particular would be very compelling and likely winnable under either Sherman Act Section 2 or FTC Act Section 5.
The FTC seems sympathetic to Apple’s arguments that companies can do whatever they want on their own platforms, even when those platforms are dominant, and even when platform owners want to participate on the platform and disadvantage competitors.
- The FTC’s views appear increasingly out of line with DOJ views on the behavior, with Congressional interests, with an emerging legal, policy, and economic consensus on the need for neutral treatment on platforms, with language in the Democratic platform, and with Democratic Presidential nominee Hillary Clinton’s statements regarding the need for more aggressive antitrust enforcement and her intention of appointing antitrust enforcers who are willing to take more aggressive actions.
In this article we focus on conduct that has put Apple under scrutiny and that will likely lead to an enforcement action if Hillary Clinton becomes president and follows up on her tough rhetoric on antitrust.
A Closer Look at Alleged Anticompetitive Conduct
As evidenced by the company’s yearlong dispute with Spotify, Apple appears willing and able to disrupt already competitive markets in the App Store through exclusionary conduct. As the proprietor of the iOS platform as well as a competitor within the App Store, Apple uses certain levers to diminish competitiveness for its own gain, add friction to competitors’ transactions, or wholly block their attempts to better interact with consumers.
Conduct 1: Sherlocking. One of the biggest worries for app developers is “sherlocking,” when Apple updates iOS to include functions similar to third-party app features. Such an update can lead to a reduction in market share, a lack of drive for users to search outside of iOS for a function readily available, and sometimes can put an end to what had been a profitable business for the developer. Apple arguably “sherlocked” Spotify and other music streaming services when it released Apple Music on June 30, 2015, incorporating it into iOS.
Some developers fear any update to iOS could end their business. Apple, with its pitch of “There’s an app for that”, made it clear in the early days of the iPhone what the device was offering: Apple would provide the platform and the essential functions for its device, and developers would fill in any blanks they saw through the App Store. That led to a vibrant ecosystem of independent developers who built businesses off their App Store sales.
Now, however, iOS has matured, and Apple needs to provide new use cases to keep consumers buying new devices. Each year at Apple’s Worldwide Developers Conference (WWDC), third-party developers – sometimes sitting in the event’s crowd – learn that core functions of their apps have been enveloped by iOS. That forces them to scramble to pivot or add premium features. Some developers just end their projects outright.
Developers we spoke with and sources online helped build an incomplete list of popular apps – some in iOS, some on Apple’s other platforms -- potentially sherlocked at the most recent June 2016 WWDC: Scribe, Copied, Sidefari, MacID, Pushbullet, TextExpander, Various Emoji apps, and Various Breathing apps. Past years have seen just as many companies find their newest competitor in Apple. Apple has also prohibited apps from the App Store and then added similar functions itself.
Conduct 2: Tying. Tying is when a company will only sell one product on the condition that the buyer also purchase another product. Apple employs a widespread tying strategy throughout its walled garden ecosystem, which on one hand provides consumers with desired integration and on the other hand is an effective monopolization tool. Most relevant here, Apple tied Apple Music to iOS in June 2015. The anticompetitive effect is clear - consumers new to iOS are unlikely to search out a music streaming service like Spotify when one is built into their operating system. In fact, when Apple Exec Eddy Cue was recently asked how Apple Music competes against services like Spotify, he replied, “It can't be about a service that's just providing the songs, because anybody can do that. It starts by the level of integration that we have within our product.”
Apple also ties its payment system to the App Store, requiring competitors to use “In-App Purchase” and forcing price increases. Apple requires that all digital services and apps use its “In-App Purchase” (IAP) payment service for in-app purchases. Despite the existence of other options, such as PayPal, Apple will remove any app from the App Store that tries to circumvent IAP. With every transaction on IAP, Apple takes a 30 percent fee off the top – often called the “Apple Tax.”
The Apple Tax effectively requires Spotify to raise its subscription price from the regular $9.99 for a premium account to $12.99 to cover costs. Meanwhile, since Apple obviously does not pay itself the same 30 percent surcharge, it can offer its service for $9.99. One aspect worth noting is that Apple likely makes more on a Spotify subscription sold on the App Store than an Apple Music subscription. The 30 percent from a $12.99 Spotify subscription comes without any overhead calculated in – about $3.90. The $9.99 Apple Music subscription requires about 70 percent going back to music publishers as well as deductions for other overhead costs.
Apple also does not allow Spotify to offer its family and student discounts through its iOS app. Meanwhile, Apple Music is able to inform users about the same kinds of deals through its app. Apple generally never negotiates on its IAP requirements or its Apple Tax cut, except within markets it does not have an interest or has no market power. For example, the company does not require services that offer physical goods to use IAP, as a number of payment options are available on Amazon, Uber, and others. That shows some level of flexibility that it refuses to offer digital competitors like Spotify.
Conduct 3: Denial of Updates. Spotify’s most recent issues extend from Apple’s denial of an update that lets the service communicate with its users. Outside the App Store, a user can purchase a Spotify subscription for the more competitive price of $9.99 per month. However, Apple recently blocked the company from communicating that fact to iOS users in the Spotify app. In Spotify’s first version of its recent app update, the company included a popup that appeared with a signup link for Spotify Premium when a user tried to access premium features. That version of the app was rejected from Apple’s app review – an opaque process that the company uses to induce behavior.
Spotify resubmitted a new version of the update that had the same popup except it omitted the link to sign up for Spotify premium. Instead, the message simply notified the user that they did not have full access to all of Spotify’s premium features. That message seemingly had no call to action or a workaround to push users out of the App Store, yet Apple similarly rejected the update. An image of the second version of the popup message appears below: