• July 30, 2021
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It is nearly impossible to go anywhere today without seeing someone with an iPhone in hand or AirPods in their ears. This is especially true among teenagers. According to the most recent semi-annual teen survey conducted by investment firm Piper Sandler, 86% of teens own an iPhone and 89% expect an iPhone to be their next phone. These percentages are at an all time high, increasing every year, demonstrating the ever-growing influence of Apple. 

Apple is a technology company that “designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories, and sells a variety of related services.”

Apple’s hardware products include the iPhone, iPad, Mac, Apple TV, and airpods. These devices run on Apple’s proprietary mobile operating system (iOS). The company’s services include: the App Store, iCloud, AppleCare, Apple Arcade, Apple Music, Apple TV+, and other services and software applications.  

Recently, accusations that the tech titan is a monopoly has reached government scrutiny.

What is a Monopoly?

A monopoly exists when a person or enterprise is the sole supplier of a product or service. No close substitutes exist in the market. Because monopolists are the only suppliers, they have the power to set prices, forcing interested customers to meet the cost and stifling any competition.

To prevent monopolies, the government created antitrust laws (laws that ensure fair competition exists in a market, protecting consumers from unjust business practices). According to the Federal Trade Commission (FTC), there are three main antitrust laws still in effect today.

In 1890, Congress passed the Sherman Act (the first antitrust law), outlawing “every contract, combination, or conspiracy in restraint of trade” and any “monopolization, attempted monopolization, or conspiracy or combination to monopolize.”

Next, Congress passed the Federal Trade Commission Act in 1914, establishing the FTC and banning “unfair methods of competition” and “unfair or deceptive acts or practices.” Those “unfair methods” were further defined in a companion piece of law: the Clayton Act, also passed in 1914, which significantly strengthened the Sherman Act. 

The Clayton Act extended the purpose of antitrust laws to deal with anticompetitive behavior as well as monopolies. Anticompetitive practices reduce competition and lead to higher prices, lower quality, or less innovation. These practices generally fall into two categories: agreements between competitors or dominance through monopolization.

According to the FTC, “it is illegal for businesses to act together in ways that can limit competition, lead to higher prices, or hinder other businesses from entering the market.” The FTC limits companies from large growth through the acquisition of a competitor. For instance, when two already dominant companies merge, it creates a company so powerful that other competitors are unlikely to ever pose a threat. Companies acting together to fix prices, divide markets, rig bids, or engage in other tactics that stifle competition is illegal.

It is also illegal for a company to attempt to monopolize trade, meaning an enterprise cannot act to maintain or obtain a dominant market position by excluding competitors or preventing new competition.

Is Apple a Monopoly?

Recently, the House Judiciary subcommittee on Antitrust released a nearly 450 page report on Big Tech (Amazon, Google, Apple, and Facebook). The report is the culmination of sixteen months of hearings, research, and analysis into the competitive practices of the four tech titans. 

The report concludes that Apple has “monopoly power” over software distribution on iOS devices, allowing the company to develop large profits from the App Store and extract rent from developers.

The report says that “Apple is the leading smartphone vendor in the U.S., accounting for approximately 45% of the domestic market.” Globally, Apple has less than 20% of the smartphone market. 

“Apple does not have a dominant market share in any market where we do business. That is not just true for iPhone, it is true for any product category,” said Tim Cook, CEO of Apple, in a pre-prepared statement for the antitrust hearing.

When referring to the smartphone market, Cook is right. The report defines a different relevant market: the distribution of software apps on iOS devices. 

Key takeaways from the report:

It is nearly impossible to go anywhere today without seeing someone with an iPhone in hand or AirPods in their ears. This is especially true among teenagers. According to the most recent semi-annual teen survey conducted by investment firm Piper Sandler, 86% of teens own an iPhone and 89% expect an iPhone to be their next phone. These percentages are at an all time high, increasing every year, demonstrating the ever-growing influence of Apple. 

Apple is a technology company that “designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories, and sells a variety of related services.”

Apple’s hardware products include the iPhone, iPad, Mac, Apple TV, and airpods. These devices run on Apple’s proprietary mobile operating system (iOS). The company’s services include: the App Store, iCloud, AppleCare, Apple Arcade, Apple Music, Apple TV+, and other services and software applications.  

Recently, accusations that the tech titan is a monopoly has reached government scrutiny.

 

  • No alternative to the App Store.

According to the report, “Apple’s App Store is the only method to distribute software applications on iOS devices. It does not allow alternative app stores to be installed on iOS devices, nor does it permit apps to be sideloaded.”

Developers say that “Apple abuses its control of its valuable user base by prohibiting alternative payment processing options to compete with Apple’s IAP (in-app purchases) mechanism.”

  • “Supra-normal profits.”

The report also focuses on Apple’s 30% royalty from IAP. According to a 2019 market analysis, Apple’s net revenue from the App Store is projected to be $17.4 billion for 2020. Due to the $99 annual fee paid by Apple’s 27 million iOS developers, App Store revenue also includes $2.67 billion in addition to commissions and fees for IAP.

“Apple’s monopoly power over app distribution on iPhones permits the App Store to generate supra-normal profits. These profits are derived by extracting rents from developers, who either pass on price increases to customers, or reduce investments in innovative new services. Apple’s ban on rival app stores and alternative payment processing locks out competition, boosting Apple’s profits from a captured ecosystem of developers and consumers,” wrote the authors of the report.

  • IAP requirement stifles competition.

At one point in the report, a developer that offers an app that directly competes with Apple was forced to raise prices to pay the commission. As a result, it was less competitive and fewer iOS users purchased its service. 

Similarly, Epic Games (makers of the game Fortnite), which recently filed an antitrust lawsuit against Apple, told the federal court that Apple’s commissions force developers to “increase the prices they charge in order to pay Apple’s app tax.”

International competition authorities also examined the competitive effects of Apple’s App Store fees and commissions. The Australian Competition and Consumer Commission (ACCC) observed that Apple’s control over app distribution allows it to extract commissions from apps, reducing the revenue that app providers can invest in content.

The Netherlands Authority for Consumers and Markets (ACM) noted that Apple’s 30% commission on IAP “may distort competition” because Apple’s IAP requirement often applies to apps competing directly against Apple’s apps. Typically, this gives Apple’s competing service an advantage.

  • Apple has an unfair advantage with app search rankings.

“Apple’s mobile apps routinely appear first in search results… a powerful advantage that skirts some of the company’s rules on search rankings,” explains Tripp Mickle on the Wall Street Journal. The New York Times reported that six years of analysis of App Store rankings found Apple-owned apps ranked first for at least 700 common search items. “Some searches produced as many as 14 Apple apps before showing results from rivals,” wrote the author from the New York Times.

Rival app developers slipped down the search rankings as Apple introduced new apps. For instance, Spotify had long been the top search result for “music,” but Apple Music quickly overtook it after it joined the App Store. Two years after Apple Music was introduced, eight of Apple’s apps appeared first when searching “music,” and Spotify had fallen to the 23rd result.

Comparably, Audiobooks.com was the top search result for two years before Apple Books overtook it. Audiobooks explained to the Wall Street Journal that losing the top search ranking “triggered a 25% decline in Audiobook.com’s daily app downloads.”

  • Apple applies different rules to third-party apps.

In response to criticism of their apps being ranked first, Apple told Wall Street Journal that “the No. 1 position for Books in a “books” search is reasonable, since it is an exact name match.” Apple commonly responds to such criticism with the aforementioned reasoning. However, it appears that Apple doesn’t apply the same rule to third-party apps.

Documents reviewed by subcommittee staff reveals Apple previously punished non-Apple apps that achieved a high search ranking because its name was a generic name that was also commonly searched. Apple determined it was “cheating” to give an app the name of a commonly searched item.

“The reality is Apple continues to move the goalposts and change the rules to its advantage and the detriment of developers,” noted Spotify. “[Apple’s] selective and capricious enforcement [of its App Store policies] is designed to put companies like [Spotify] at an untenable competitive disadvantage.”

Philip Shoemaker, former Senior Director of App Review for Apple, said that Apple “was not being honest” when it claims to treat every developer the same. 

“It’s complete tyranny, and the rules are often interpreted differently by different reviewers because they’re left intentionally vague. So we live in constant fear we may have violated these vague rules, and that the next update to our applications will be blocked by Apple,” testified David Heinemeier Hansson, Chief Tech Officer and Co-Founder of Basecamp, before the subcommittee.

  • Sherlocking.

The report also examines how Apple often releases apps that replicate what top app developers sell on the App Store, a practice known as “Sherlocking”. Some app developers have complained that Apple uses its control of iOS and the App Store to discover sensitive business data that allows the company to better compete against third-party apps. 

The subcommittee staff cites Steve Jobs, former Apple CEO, saying the company has “always been shameless about stealing great ideas” as proof that Apple monitors the App Store to copy good ideas to use against their competitors.

The Apple Developer Agreement, which Apple requires every app developer to agree to, states that in exchange for access to the App Store, Apple is free to build apps that “perform the same or similar functions as, or otherwise compete with” apps in the App Store. 

Once again, Apple seems to follow different rules than the ones they set for third-party apps. While the Apple Developer Agreement allows Apple the right to replicate third-party apps, Apple tells developers not to “copy another developer’s work” and punishes those that do.

  • Excluding rivals.

At another point in the report, the subcommittee found that Apple uses its monopoly power over app distribution to exclude rival apps. The report points to Apple’s actions after introducing their Screen Time app, a feature that helps iOS users limit the time they spend on their iPhone.

Soon after, Apple removed many of the lead rival parental control apps from the App Store. Apple explained that the apps they removed used a technology called Mobile Device Management (MDM), which allows parents to remotely take over their children’s phones and block content. Apple noted that this could potentially lead to privacy breaches.

According to the New York Times, the parental control apps that used MDM were offered in the App Store for years and approved by Apple with every update. Apple only found an issue with MDM after they released their own version of a parental control app.

Despite Apple’s narrative of privacy reasons motivating their removal of rival apps, the company reinstated many of the apps they removed the same day it was reported the Department of Justice (DOJ) was investigating Apple for any antitrust violations. 

The subcommittee staff learned that Apple has used its control of app distribution to exclude rivals in other instances as well. Shoemaker explained that Apple’s senior executives would find pretextual reasons to remove competitors from the App Store.

So, is Apple a monopoly? Not in terms of the smartphone industry. Even though they lead the market, they do not make up the entire market nor do they significantly stifle iPhone competition. However, in regards to the App Store, Apple is most definitely a monopoly. As the sole provider of app distribution on iOS devices, Apple uses its power to harm competition to its own benefit, proving their “monopoly power”.

The House subcommittee made numerous recommendations for what Apple should and should not do in the future. If these recommendations eventually become law, Apple may have to change core business practices, including how it distributes apps through the App Store.

Author

sakaelin@students.wcpss.net
Hi! My name is Sydney and I am a staff writer for The Mycenaean. I am also a member of Key Club and Co-President of the Food Club Bank. I’m the last of six Kaelin family members to go through Leesville.

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