Sunday, April 11, 2010

Are Apple's Actions Anticompetitive? Doubtful

As has been widely discussed, it appears that Apple will be preventing iPhone applications developers from using anything other than Apple-approved development tools -- ruling out, among other tools, Adobe's Flash CS5. See here for more of the facts and here for more editorial comment.

Do these kind of restrictions rise to the level of being anticompetitive in the sense of antitrust? Let me sketch some possibilities, none of which I think make for a reasonable business strategy nor do they meet any kind of anticompetitive test. The most likely explanation is a very non-strategic one, simply that Apple wants to make sure that its iPhones and iPads meet the kind of quality test that its vertically integrated Mac platform does. Applications can impact the overall user experience in a variety of ways, and Apple has all the incentive in the world to make sure that they do not impair performance.

It pays to go back and re-study the Microsoft antitrust case. There, the government's claim was that Microsoft was excluding other internet browsers such as Netscape from the original equipment market, mostly by bundling its own browser (Internet Explorer) with its operating system, Windows. The alleged reason for this exclusion was Microsoft's desire to protect its market power in the operating system market. Interesting - the actions were not designed to gain market power in the browser market, but to protect a position in operating systems. Supposedly, Microsoft feared that as other browsers got traction, software developers could write applications that would interface directly with the browser (so called middle-ware) rather than having to interface with the operating system itself. Once applications could be written for browsers, Windows would potentially face more potential entry into the operating system market, since new operating systems would not face the chicken-and-egg problem of not having any applications that could interface with it. That is, the argument was that Windows had a nice network externality working for it, through software developers, and the middleware concept was seen as a threat to the market power that that network externality conveyed.

Now this is not the only possible angle to thinking about Apple and the exclusion of non-approved development tools, but it is an interesting one to consider. That is, could Apple be excluding some development tools to protect its position in a related market?

What market might Apple be trying to protect? Maybe its the Applications Store platform? This is what the post by John Gruber linked to above builds on. Can one build a coherent argument that Apple is restricting development tools so that the Apps Store becomes a standard, for purposes of exploiting market power? This is not unlike some of the earlier antitrust claims, more popular in Europe, that Apple put restrictions on iPods and iTunes so as to lock customers into both platforms.

I think there is one big weakness in any anticompetitive angle to this story, and that involves the inherent lack of power of a standard on an applications store platform. Recall the essential source of market power in the Microsoft story: the software development network externality, whereby the fixed costs of writing for different operating systems gave the operating system with the largest installed base an insurmountable advantage.

I cannot see anything working the same way in the mobile phone applications market. One possibility would be to get all developers writing for the iPhone platform, thereby giving the iPhone and iPad the chicken and egg externality benefit. But the mobile phone market is way too competitive for this story to hold water. The market share of iPhone is around 25%, with very strong competitors. Maybe for the iPad, but that is a whole new market that is too early to even assess for viability. I also do not know how much credence the "fixed cost of development" story should be given here. With Microsoft, I could see that writing something like a whole new spreadsheet package for a new operating system, and overcoming the advantage of installed base of existing products, would be a real challenge. But for mobile apps? Are the fixed development costs really going to prevent apps developers from writing more than one version of a product, if there were two platforms with different requirements? Isn't the gaming market a point against this argument, with popular games being written for the different platforms all the time?

Maybe the Apps Store market itself? Could Apple be trying to protect a dominant position in selling applications? Doubtful. For one, if that were the objective, I fail to see why restricting product would be beneficial -- does Amazon restrict products from its site? Second, it is way too easy for competing applications stores to launch and compete.

I am left with Occam's Razor, having to accept the simplest explanation: Apple wants to approach what it would have with a fully vertically integrated chain from hardware to operating system to applications. That means putting some restrictions on the applications.

No comments: