iphone drawing, BBC
My blog on Rhizomicon details the issues behind the antitrust probe of Apple, although there is some degree of overlap. If you’re interested, feel free to read that blog post first.

Currently, the US Department of Justice {DOJ} and the Federal Trade Commission {FTC} are determining if Apple should be investigated for antitrust activities. The issues are::
  1. Apple announced it will not allow Adobe’s Flash middleware on its iPhone platform
  2. Apple’s current software development kit for the iPhone limits the use of third-party technologies
  3. Steve Jobs wrote a blog explaining why Flash was an inferior technology
  4. The DOJ & FTC are reported to be looking into antitrust actions by Apple
  5. Some economists and strategists are claiming that antitrust is unwinnable because of Apple’s relatively small share in iPhone handsets

In the US, antitrust law and the Sherman Antitrust Act are focused on fostering competition and the competitive landscape, not protecting competitors. A monopolist is one seller and many buyers and their profit comes from a lack of competition and a manipulation of supply. Regulating monopolies and enforcing antitrust often {ideally} considers the “welfare” of the consumer, particularly in terms of pricing. Generally speaking, antitrust cases involve the following, often within the context of fairness::

  • Market definition, in order to determine if a firm has market power
  • Market power, i.e., the ability of a firm to charge a very high price, relative to {marginal} cost
  • Barriers-to-entry, i.e., the ability of an incumbent firm to limit competition or secure resources or advantages that others cannot
Examining the Apple decision to dump Flash may appear to be a non-sequitur when it comes to antitrust. Many have analyzed the situation in the following fashion:
  • Apple operates in defined market of smartphones
  • Apple’s market share in smartphones is relatively small, hence has little market power
  • Apple is fostering more competition by embracing open technologies, rather than the middleware of Flash {middleware allows a program to operate across platforms}

The problem here is the narrow definition of what Apple does. The focus here is on the single market of the hardware, i.e., handsets. In reality, Apple not only sells handsets, but has created a platform that incorporates both hardware and software {apps}, which are interrelated. The more apps, the more attractive the platform. The more attractive the platform, the more incentive there is to develop apps.

In order to address the analysis of platforms in antitrust, multi-sided markets, which are characteristic of platforms with more than one distinct set of clients/consumers, offers useful insights. Apple’s set of interrelated multi-sided markets are::

  1. iPhone hardware {smartphone}/iPad hardware {tablet} sold to consumers
  2. Apps and digital content sold to consumers on the web/mobile web
  3. Platform for smartphone/tablet apps for developers
These intertwined sides of Apple’s market help to properly define it. Examining Apple’s “market power” in terms of smartphone market share is woefully misguided. Let’s assess Apple’s market power in the above three areas::
  1. 15% of the smartphone market, 33% of touchscreen smartphone market [1]; tablet share-??? developing {Apple has relatively low market power in hardware}
  2. 99.4% of mobile apps {$4.2B market-2009} [2]; 25% of all music, 69% of digital [3] {other content types ???} {Apple has moderate to strong market power in software}
  3. See #2 {Apple is a monopolist in apps, but the dynamics of the market are very fluid}
The unknowns {???} are evolving stories or issues I haven’t researched yet. In light of Flash, the most damning market share figure is not the sales of hardware, but the share of apps that’s over 99%, which includes free apps. Apple dominates in this rapidly growing category and by thwarting the middleware of Flash, its market power forces developers to prioritize Apple and obliterates the possibility of a single build that can be used across platforms and devices.
I believe that the platform needs to be examined in its entirety, not just the market share of hardware, and that care should be taken to determine the effects of Apple’s conduct.While Adobe may be worse off due to the fact that developers are likely to channel development towards the dominant iPhone platform that doesn’t use Flash, the acid test will be if developers are worse off. The following table does a rough assessment of Apple’s market sides in smartphones::
Market Sides\Antitrust Dimensions Market Definition Market Power Barriers-to-Entry
Hardware Smartphone handsets & tablets for consumers Low Low
Apps Software for iPhone-based hardware Very high Very High
Platform for Apps Marketplace to sell apps to consumers Very high Very High

In terms of hardware, Apple is profiting from its relationship with AT&T, which is subsidizing the price of the iPhone. Teardowns of the iPad show that margins are relatively slim, but the strategy is to increase the number of users to attract developers. In terms of software, Apple controls the app game.

How I see it is that by forcing Flash off of the iPhone platform, it’s giving developers fewer degrees of freedom for technologies that use Flash. Rather than develop one build for an app that uses Flash middleware, developers will have to create several builds using HTML5. Given the dominance of Apple’s App Store, there are strong incentives to develop for that platform crowding out resources to develop for others, such as Android. Apple’s justification is that it needs to preserve the quality of the user experience, but will that be good enough for the DOJ or the FTC under the Obama administration? Technology is full of uncertainty and fortunes can change overnight. Scrutiny of Apple should consider multi-sided markets and address the health of the competitive environment.

Song:: Feist-‘We Can Work It Out’

Twitterversion:: Development of an #Apple  antitrust analysis framework. How competitive is ecosystem on iPhone platform #ThickCulture http://url.ie/621a @Prof_K