Time to prosecute Apple for monopolization

Twenty years ago, the Federal Trade Commission launched a monopolization investigation of Microsoft that, a few years later after the agency deadlocked, led to a landmark Justice Department antitrust prosecution and settlement. Now the FTC is faced with a radically restructured technology market in which smartphones and tablets—and thus Apple, by far the platform leader in that space with its iPhone, iOS operating system, iPad and App Store—have all but replaced desktop PCs. But despite a nine-month review, the federal competition regulator has done nothing to reign in Apple’s anticompetitive use of the iOS platform, especially Apple’s newest and controversial foray into streaming music services.

The Microsoft case was based on the company’ monopoly power arising from its then-dominant Windows OS platform. Apple’s ubiquitous smartphones and tablets are instead today the critical platform for U.S. consumers to engage in mobile computing and to consume digital media. Apple realizes some 80 percent of all smartphone revenues worldwide, enjoys a huge and by-far leading market share in music downloads, and sells more digital smartphone apps than anyone else worldwide. That’s the stuff of what all antitrust lawyers and courts recognize as monopoly power, particularly since scale, entry barriers and so-called “network effects” reinforce Apple’s platform dominance to prevent new competition.

{mosads}U.S. antitrust law, of course, condemns exclusionary use of a monopoly. No one questions that Apple obtained its iOS platform monopoly power other than by creating “insanely great” products. What is and should be of antitrust concern is how Apple has used that power in anticompetitive ways, methods which go far beyond even what Microsoft was lambasted for doing to Netscape and other emerging competitors in the now-ancient 1990s.

Take a few examples. Just as it did to Amazon.com when it introduced iBooks in 2010, Apple is now targeting the likes of Spotify, Pandora, Rhapsody and iHeartRadio while at the same time introducing its own streaming music service, Apple Music. Apple’s iBooks conduct was judged illegal as price fixing, a verdict upheld on appeal, because it tried (with success) to increase retail prices to consumers for e-books. Not content with taking a whopping 30 percent of all subscription revenues that Pandora and other app developers earn from iOS sales, Apple’s App Store terms actually prevent competitors from allowing users to sign up, inside their own apps, for a lower-priced service directly from themselves—or even informing customers of those cheaper deals!

That’s not an isolated example. Apple uses secret, undocumented interfaces to to give its music service exclusive access to features on iOS like the popular Siri. (Microsoft was forced to open its Windows programming interfaces as part of the 2002 antitrust settlement.) Apple has leveraged its market power by bundling Apple Music into the current iOS version and preventing its removal. (Microsoft was found liable in large part for bundling its Internet Explorer browser into Windows.) And Apple steers iOS users to the new Apple Music service by automatically returning links to songs in their library to its own streaming versions. This last practice is basically indistinguishable from American Express’s policy of precluding merchants accepting their credit cards from recommend­ing other—and lower-priced—options like MasterCard and VISA, for which Amex was found to have violated the Sherman Act in 2013 and required by the courts to rescind.

Even worse, Apple’s close relationship with record labels puts Apple in the driver’s seat, just as with e-books, to “orchestrate a conspiracy among the publishers to raise prices,” as the court of appeals held. The recording industry has consolidated to the point that there are only a small handful of players left. This too happened on the FTC’s watch; while the Clinton Administration’s FTC held a hard line on consolidation (for instance blocking Time Warner/EMI), the Obama FTC has allowed the industry to merge into just three players—the latest being the Commission’s unconditional approval of the Universal/EMI deal. The record labels, and thus Apple, are openly hostile to a mobile free tier, which is a critical marketing funnel for streaming entrants and neces­sary to compete in that fast-growing market. Is Apple now in cahoots with the record labels like it was with book publishers? Seems so, indeed.

Apple gained significant power over the record labels as the most important outlet for legal music downloads. New services such as Pandora, Spotify and the like threaten to undermine Apple’s historic dominance and its now-cozy relationship with the recording industry. These competing music streamers offer cross-platform services that ease switching between iOS and Android, which threatens Apple’s platform monopoly. As part of the e-books decision, the courts ordered Apple to submit to monitoring to ensure compliance with the antitrust laws.  Apple refused to provide the court-appointed monitor sufficient access to information necessary to enforce compliance, and has refused all requests for information about Apple Music.   

Remarkably, the same executives responsible for Apple’s illegal e-books price-fixing scheme are spearheading the company’s streaming music strategy, including Eddy Cue, head of Apple’s software and Internet services. Cue was quoted saying “If I had it to do all over again, I’d do it again…. I’d just take better notes.” Those are fighting words the FTC should not accept. It is time for the agency finally to conclude its investigation and bring a monopolization case against Apple. The writing is on the wall, all the agency has to do is read it.

Manishin is a Washington, DC antitrust attorney who served as counsel for competitors in both the US v. AT&T and US v. Microsoft monopolization cases.