A Closer Look at Apple & Antitrust

I'm not a big fan of most monopolies, though some are handy. I'm fine with the government(s) having monopolies on roads, for instance, and I'm a big believer in having a strong, robust public education system, though even there I certainly support the additional presence of private, non-government supported schools.

In business, monopolies can get a little trickier. For instance, I think breaking up Standard Oil was an appropriate action on the part of government a century ago, though my Objectivist friends tend to vehemently disagree. I also think that breaking up AT&T in 1984 was a good thing, though I recognize the tradeoff in reliability we got with the increase in choice, innovation, technologies, and services.

On the other hand, there's the absurd claim Psytar made that Apple has a monopoly on Macs. Well, it's not an absurd claim -- Apple obviously has a monopoly on Macs, but it's like claiming that Toyota has a monopoly on Priuses, or that Dell has a monopoly on ugly-ass computers.

OK, the last one is just a dig on Dell. Plenty of other PC makers make ugly-ass computers. The point is that Apple is still merely one of many competitors in a thriving and cutthroat PC business. Apple's Mac business is merely one brand among many, and Psystar's claim that Apple should not be able to have a proprietary platform as a means of competing in this diverse marketplace is beyond laughable.

Anyway, back to the issue of non-imaginary monopolies. I also think that Microsoft should have been broken up, as was first ordered during the remedy phase of that company's famous antitrust trial in which it was convicted of being an abusive monopoly. I furthermore think that if the Bush Administration hadn't punted on this case that a breakup would have occurred, though we'll never know if that's so.

That punting was the result of a change in philosophy between the Clinton Administration's DoJ, which first brought the case, and the Bush Administration's DoJ, which inherited it. The former believed in vigorous monitoring of antitrust activity, while the later believed in the power of the free market to take care of itself.

This sort of change happens (in greater or lesser degrees) whenever we have a change in administration, and anyone cursing me for talking politics can A.) Boink themselves, and B.) Note that technology and politics often intersect, and such is the case today.

Getting to the Point

On Monday, I covered a report that the Obama Administration's DoJ is looking askance at the telecom industry, including the exclusive relationships that carriers and handset manufacturers have developed. For instance, and the reason I'm writing this column, the exclusive deal Apple and AT&T have developed.

That deal allows AT&T to be the sole authorized carrier of Apple's iPhone product line in the U.S. for a total of five years. It is mirrored by similar deals involving other high-profile smartphones and other carriers. For instance, Sprint is the exclusive provider for the Palm Snoozé Pré, and Verizon has, or at least had, an exclusive deal with Research In Motion for the BlackBerry Storm.

And these were hardly the first such exclusive deals. This industry has long seen flasgship phones being introduced in exclusive deals with this or that carrier, though the iPhone is easily the highest profile and most successful of those deals, and is likely the catalyst for the DoJ's attention on this industry.

The concern from the DoJ is that exclusive deals unfairly harm smaller competitors who don't have access to these devices, which results in the big getting bigger. AT&T has certainly raked in millions of subscribers eager for the iPhone. Companies like Apple, Palm, Blackberry, and Nokia have no incentive to strike such deals with those smaller competitors due to their lack of reach and resources, locking them out of the highest-of-the-high-end market.

It is frankly time that we have oversight on antitrust issues, even if it means Apple comes into the DoJ's crosshairs.

This could, in theory, result in harm to consumers as the monster telecoms consolidate power and eliminate choice. Looking at the iPhone microcosm, we can see a specific example of that: If customers want the iPhone and want to buy it at a subsidy, they have to agree to a very expensive data plan over a two year contract. There's no other choice in (authorized) carriers, and thus no competition (within the niche iPhone market) and therefore no pricing pressure.

So in this scenario, consumers face artificial barriers to lower prices in the form of these exclusive deals, while smaller carriers lose customers to the big carrier (AT&T in this case) because they don't have access to the iPhone.

This is part of the reason that numerous European regulatory agencies have forced Apple to offer the phone through non-exclusive deals with multiple carriers.

Winner and Losers

Who wins with these exclusive deals? Well, AT&T wins because it gets the iPhone and the millions of customers in the U.S. that want the device. In addition, its gets to collect those stellar data fees I mentioned above, making the device profitable for the carrier, despite the astronomical subsidies it pays to Apple.

Apple wins because it stays in control of its product. In this case, that control means its easier for Apple to ensure a great user experience, and it's far easier for Apple to get the subsidies from its carrier partner that make the device so profitable for Apple yet inexpensive enough for consumers to buy.

That last part is important: Apple's control and exclusive deal makes it easier for the company to get enormous subsidies from AT&T. Those subsidies result in this amazingly powerful device being available for as little as $199 for the newest, most bestest model. Were that system of subsidies jeopardized, it would make it more difficult for Apple and AT&T to offer the device so cheaply to consumers, making it a win for them.

I'd also argue that consumers win in another way, too. I think that the user-experience offered by Apple, including support for the device, is enhanced by the exclusive deal. Having but one carrier to deal with keeps everything nice and tidy. We pay the price of that, though, in the form of those high data fees I keep mentioning.

To Regulate or Not to Regulate?

Should the DoJ be mucking about with the free market? Should the government entity be investigating our precious Apple? After all, Steve Knows Best™, right?

The short answer is yes, it should. It is the DoJ's job to look for monopoly abuse that stifles competition and harms the consumer, and that applies even to companies we like (well, more or less -- I am still a tad tense about Steve trying to undermine the free press, banning books, and a few other things, but I am ever-so-slowly getting over it, and I do love those Apple products!) in markets we have taken an interest in (computers, digital media devices, and smartphones).

The long answer, however, is that I don't think there's much fire underneath the smoke of exclusive deals. RIM, Apple, and Palm (not to mention Nokia, Samsung, HTC, Sony-Ericsson, and other handset manufacturers) are competing fiercely. Yes, the top phones are going to individual carriers here in the U.S., but that's where the competition is.

More importantly, consumers will go to where the phones are, leaving the carriers beholden to the device makers, an important check on any power that those carriers might otherwise garner.

I think that consumers will benefit the most in the end by these manufacturers and carriers competing to add features and lower prices. That competition is currently taking place between pairs of companies, and as long as the competition between those pairs of companies remains vigorous, consumers will benefit.

For instance, if Palm can eventually make the Pré good enough, Apple and AT&T would be forced to lower prices and/or make their own improvements. Should RIM be able to make a Blackberry that puts the iPhone to shame, AT&T and Apple will be forced to react. And then there's Google's Android platform, which has enormous potential, and is sure to keep mixing it up in the market place.

Much Ado...

The only real threat I see in this news is if the DoJ decides to go after Apple and AT&T -- and make no mistake that it's the iPhone's success alone that makes exclusivity deals an issue -- to make a point or a statement, as opposed to to pursuing action based on the merits of the case.

I'm fine with the DoJ looking at the telecom industry for possible monopoly abuse, but my armchair reading of the industry is that there is no actual abuse of monopoly power happening...yet.

It is frankly time that we have oversight on antitrust issues, even if it means Apple comes into the DoJ's crosshairs. I'd rather they spend their efforts looking at the recording industry's practices, or perhaps some issue with energy production and distribution, but I don't think that Apple should be immune from examination just because the company makes best-in-class products that we know and love.

All that said, and for what it's worth, I'd be surprised if the DoJ took action against the telecom industry for this particular issue at this particular time.