Apple Inc. (NASDAQ: AAPL) announced a new plan earlier this week that would allow content creators like publishers, music companies, and game makers to offer and receive payment for subscriptions to digital content. The Wall Street Journal is reporting today that “a person with direct knowledge of the matter” has said that Apple’s plan is now getting attention from US government antitrust regulators in the Department of Justice and the Federal Trade Commission. The interest in Apple’s new plan is “preliminary and might not develop into a formal investigation.”
It probably shouldn’t, and even if a formal investigation is launched, there is little reason for Apple to be forced to modify its plan. After all, Apple has plenty of competition in the market for smartphones, and competition is getting stronger every day from apps markets for Android-based smartphones from Google Inc. (NASDAQ: GOOG), Research in Motion Ltd. (NASDAQ: RIMM) BlackBerry phones, and even late-bloomers like Nokia Corp. (NYSE: NOK) which plans to use Windows Phone 7 from Microsoft Corp. (NASDAQ: MSFT) as the operating system for its smartphone platform.
According to the WSJ, the federal agencies “are both interested in examining whether Apple is 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.” The simple answer to that inquiry is, “So what if it is?” After all, no one is forcing an apps developer or a content provider to partner with Apple.
One argument that content providers make is that Apple’s 30% cut squeezes their profits. It absolutely does. But if content providers sell through Google or RIM or Nokia apps stores, and exclude Apple, free-market theory would say that Apple would have to adjust its pricing to attract the providers.
What the providers want is for the government to force Apple to give them a profit. Does Apple really have the market power to withstand a concerted revolt among content providers?
From an antitrust point of view, probably not. The company has only a 16% share of the smartphone market and only a tiny part of the total mobile-phone market. What Apple does have is cachet, and plenty of it.
No content provider can afford to ignore the highest profile smartphone maker in the market. Thus, they want to have their cake and eat it too.
Shares of Apple have fallen nearly 1.5% in morning trading today, most likely from fallout over this story. Which proves that there’s nothing like the threat of a federal investigation to send investors running for cover.
Paul Ausick
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