Apple’s Unfair Price Advantage

There has been much written about Apple’s growing industry dominance. However still the consensus appears to be that although they are market leaders, they are not yet so dominant in any one market they are yet open to accusations of monopolistic practice. The Apple App Store subscriptions policy may have caused consternation amongst the technorati who are used to having the choice to develop using free and open source software and are not used to facing multiple channels to market where the channels have gatekeeper owners. But in the TV and Music industry it is different. Suppliers are used to appraising the value of a channel to market in terms of the profit they can make more than shouting about what the next guy is making, the attitude is more along the lines of “good on them, so long as I can turn a profit” more than “they’re screwing us; call in the DOJ”.

However that may be about to change. Where before it was difficult to pin anything on Apple because, though they are large, in no single market do they clearly have a monopoly, they may now be judged to be helping themselves to an unfair pricing advantage. This is why:

Apple, owning both iTunes and the App Store have developed an ecosystem which allows the delivery of a multiplicity of content through to Apple devices. Prior to the advent of in-app subscriptions, the App Store and iTunes ecosystems did not overlap. There has for some time, however been overlap between Apple TV movie rentals and movies available for rent and sale via iTunes, but this particular overlap hasn’t raised any concerns because in both cases Apple are simply putting margin on top of wholesale supply through an Apple channel.

With the advent of in-app content subscription, that is no longer the case. Now if a supplier wishes to get a new TV Series onto Apple devices, they can either supply Apple as a wholesaler and find the Apple mark-up as a proportion of the final sale price is a relatively attractive 19% (at least according to this NYT article) or they can sell content direct to the customer through their own in-app subscription and find the Apple mark-up as a proportion of final sale price is a rather less attractive 30%. In other words iTunes is a competitive channel to in-app subscription and it has a built in price advantage. It’s one thing to supply a take-it or leave-it channel to market but it is another thing when increasing market use of one of your channels is bound, through price disparity, to enhance the value of another competitive channel.

The in-app content subscription model is attractive to a wide variety of content beyond TV, music and film content but not just restricted to those markets. However iTunes competes with TV, music and film. So suppliers to these segments might well start to cry foul. They can now fairly say they can’t play in this new market along with businesses in the other segments without finding themselves undercut by iTunes. They can also claim this amounts to unfair pressure to supply iTunes (and Apple also has interest in Disney and Pixar of course). [Edit: This is a different more specific argument and more substantial argument I think, than those that have been put to date. Suppliers can further claim the in-app subscription policy will unfairly hold them to maintaining a higher price or lower margin than iTunes would charge for the same content, unless they artificially raise the wholesale price].

Now of course the counter argument - and it still probably holds - is that the supplier is free to choose alternative channels than any of those Apple provides. However with iPad proving to be the most successful consumer electronics product in history, this argument will look increasingly thin.

Personally I feel charitable towards Apple. I think the balance of the explanation for the inequity is that Apple are finding as market power increases, it is increasingly easy to fall into the trap of unintended consequences. E.g. that whilst a business might not plan to implement unfair practices, as it's market power grows, if policies are not carefully considered from the fair competition standpoint and if a metaphorical rule is not passed over all policy from above, it is easy to start implementing such. However a corporate business is a complex beast, so whilst there are elements of the unintended, there are still individuals within the hive mind that have taken deliberate action. So a business can be both aware and unaware of the consequences of such practices depending on where you are looking at and who you are talking to.

In any business like Apple, internally there will be resistance to the notion “we are becoming a monopoly.” A business will always tend to view itself as a fair but successful competitor, and in my view Apple has more reasons than most businesses that have reached a similar size, to view itself as just that. However it is also important for a business to understand that simply through size and power alone, and not necessarily due to any particular culture or cynicism, it is possible to move into the territory of unfair competitive advantage. It will be interesting to see if Apple have the capacity and self awareness to identify when they have crossed that line and take corrective action.

Paul Lancefield on Twitter