Jul 13, 2015 — by: Mark Reschke
Categories: Apple Music

Ftc_logoThe U.S. Federal Trade Commission (FTC) is looking into whether it should open a formal investigation into whether Apple’s new music streaming service is illegal due to the way the Apple’s App store treats rival services. According to Reuters at the heart of the complaint is Apple charging $9.99 for their own streaming service, while competing services must pay Apple 30% of their pricing to Apple’s App Store. In order to compete with Apple’s $9.99 price, companies such as Spotify will only make $7, squeezing any margin out of the company, as 30% goes to Apple. But does this complaint have any meaningful merit?

Spotify has already complained of Apple’s practices to the FTC earlier this year, and it appears other competitors such as Deezer are also urging the FTC to open a formal investigation. But a larger issue beyond streaming music services may be become a prerequisite. Does Apple have a monopoly which it is leveraging to create additional monopolies?

Perhaps Spotify and others should simply be happy that Apple has allowed the sale of their services on Apple’s devices in the first place. Lowes does not sell Home Depot’s Bear brand of paint because it is a direct competitor. Nor will anyone find Home Depot selling Lowes brand of Valspar paints. No one is demanding this be done because neither has a monopoly in the home improvement market. Apple’s streaming music service should be viewed in the same manner.

Apple does not hold a monopoly in the smartphone industry – not even close. The latest worldwide IDC smartphone market share has Apple at 18.3%, while in the U.S. Apple holds 43% market share. Apple is nowhere close to having an iPhone, iPad or iOS monopoly. If Apple holds a pricing advantage, or margin advantage over the competitive streaming music services within their small iOS market share, consumers can always shop elsewhere, pulling out of Apple's ecosystem, choosing any number of other mobile OS's running on hundreds of different phones and devices. Spotify and other streaming services are acting as if Apple is the only game in town, which is anything but true. If the majority of consumers that purchase monthly streaming services choose iOS, that is not Apple’s fault, nor should Apple be punished for attracting paying customers. Perhaps Spotify and friends have forgotten that without Apple they might not have a mobile consumer market to sell their services to in the first place... 

Apple having unequal weight within its own hardware plus software closed ecosystem is nothing new. iPods only ran its own software and application store, and only sync with iTunes. Without significant computing skills, OS X only runs on Apple hardware. Apple has always held strong to this philosophy within its own ecosystems, and none of these practices are illegal, as Apple has historically been a small market share company. Does Apple still hold a small share of the mobile market, and thus only holds a small opportunity for stream music services?

If Apple holds a pricing or margin advantage over competitive streaming music services, those companies can always sell elsewhere, and/or pull out of Apple’s ecosystem entirely, as 78% of worldwide users are purchasing Android devices. Pretending Apple holds some type of monopoly and their is no choice is obsurd.

Everyone, including the FTC, may need to be reminded that its purpose is to protect the consumer, not corporate margins. If Spotify chooses to raise their pricing on iOS devices to $12.99 in order to grow their profits, they are free to do so, and the consumer can choose to pay of look elsewhere. If some consumers love Spotify so much, they are willing to move to an Android device from an iOS device, they are equally free to do so, and save $3 a month. Apple is not limiting consumer choice by holding an advantage within their own solutions, rather, it can be argued Apple is could be creating more competition for themselves against Android. How is that a monopoly?

If Apple’s closed systems and solutions were illegal, the FTC would have shut down Apple in its infancy. Apple’s products have rarely dominated any size of overall market share, and the consumer has been free to make choices about the technology platforms it wishes to purchase, and the services on them.

If consumers lash out at Apple for Spotify leaving iOS or raising their prices, that anger wil be completely misguided. There is a large amount of choice of which streaming services one can use, and consumers can choose to leave iPhone entirely, choosing Android, Windows or even BlackBerry devices if they love their Spotify service more than their iPhone. And perhaps somewhere in this mix of controversy is Apple wanting people to make a choice.

Does the iPhone customer love Spotify so much that they would leave their entire iOS ecosystem behind to save $3 a month? Is Apple Music’s streaming service unable to compete with Spotify and others in terms of quality and depth of service? I’m guessing Apple is betting the answers are no for the majority of iPhone users. Apple has a unique position in the market and they are doubling down on their close advantages, while they clearly understand they do not hold an illegal market share monopoly, and they are betting they win yet again against any possible FTC investigation, and with the minds and hearts of consumers.

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1 Comment

  1. Peter ~ Jul. 13, 2015 @ 2:26 pm

    First, these are all the standard arguments against Microsoft way back when. Again, a monopoly is in a particular market. For example, Microsoft claimed that they did not have a monopoly on personal computer operating systems. They trotted out Apple's (overly optimistic) market share and said, "See!? We don't have a monopoly!" But their monopoly was in operating systems based on Intel CPUs. Apple used PowerPC. And, yes, there they did have a monopoly. Second, Worldwide marketshare means nothing to the FTC. So the number they're looking at is the 43% of smartphones. But that isn't necessarily the market they're looking at, either. They're looking at the market for music distribution, where iTunes is king with around 80%. And that's all music distribution--including CDs! If you restrict to just online, iTunes market share is well into the 90s. And since we're talking about music distribution, that's what the FTC will be looking at. So Apple's share of smartphones has nothing to do with it. Third, the whole "competitor A doesn't have to carry competitor B's product" is ridiculous in this context. Imagine you own a record store in a mall. You're doing pretty well for yourself. In fact, you're doing so well that the owner of the mall decides they're going to get into the business of selling records, too! So they open a space in their own mall and start selling records, too. They can undersell you because they don't have to pay rent to the mall owner because they are the mall owner! That's where this starts to get tricky. When we hear of the FTC, we think "monopoly." But the FTC does plenty of other things. In the e-book case against Apple, for example, they showed Apple colluded with book publishers requiring them to change their terms with other sellers. You can make whatever deals you want, but you can't make deals against your rivals and you certainly can't collude with your providers to do this. One of the FTC's jobs is to make sure that competition in a particular market is fair. Yes, that usually comes along with keeping down monopolies. But it also means looking for unfair business practices. To me, this is unfair. My competitor also controls the distribution of my product. #

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