Tuesday, February 22, 2011

Apple Subscription Service Draws Antitrust Scrutiny in U.S., EU: News Reports

This posting was written by John W. Arden.

Subscription terms set by Apple Inc. for media companies seeking to sell content on the iPad. iPhone, and its other devices have attracted the interest of antitrust officials in both the United States and the European Union, according to news reports.

The Wall Street Journal reported on February 18 that, according to unnamed sources, the Justice Department and Federal Trade Commission were examining whether the Apple “was running afoul of U.S. antitrust laws by funneling media companies’ customers into the payment system for its iTunes store—and taking a 30% cut . . . ”

Under Apple’s terms, companies selling digital subscriptions to content on Apple devices would have to make the content available for sale through the iTunes App Store at the best available price. They could not link to stores other than its App Store and could not offer better terms to subscribers elsewhere. This “most favored nation” clause could be considered anticompetitive if it distorts pricing.

U.S. antitrust enforcers would have to show that Apple has market power and was abusing it. Market definition is always a key issue.

While the iPhone is very popular, it has only a 16% share of smartphones and a very small share of the mobile telephone market, according to the Journal. Although Apple currently has about 75 percent of the tablet computer market, that share could drop when competitive brands start appearing.

Officials from the Justice Department, FTC, and Apple declined to comment to the Journal.

Meanwhile, a spokeswoman for the European Commission said that the Commission was “carefully monitoring the situation.”

The Independent, an Irish newspaper, quoted competition lawyer Guy Lougher of Pinsent Masons as predicting that the Apple subscription service was likely to appear on the European Commission’s radar “sooner rather than later.”

He added that a competition investigation would have to determine whether Apple has a dominant position in the market. Apple might successfully argue that the market is all digital media—a market where Apple does not have a monopoly.

The Wall Street Journal article (“Regulators Eye Apple Anew,” February 18, 2011) appears here. The Independent article (“Apple subscription service attracts regulators’ attention,” February 18, 2011) appears here.

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