More Anti-Trust Woes Ahead For Apple?

Editor’s note: Charley Moore is a lawyer and the founder of online legal service Rocket Lawyer. Follow him on Twitter @charlesmooreesq.

When John D. Rockefeller was told about the U.S. Supreme Court’s decision to break up Standard Oil, the founding titan turned to his golfing partner and said, “Father Lennon, have you some money?” The priest first said, “No,” but then asked, “Why?” Rockefeller replied, “Buy Standard Oil.” It was good advice. Being subjected to stern anti-trust regulation was proof that Rockefeller had indeed built the most valuable private company in the world — one that would ultimately be even more valuable broken into parts.

This week, the Justice Department announced new monopolist targets as it slapped Apple and five of the largest book publishers with an antitrust lawsuit. Attorney General Eric Holder accuses the companies of price collusion in connection with e-books. Already, three of the five publishers investigated, the Hachette Book Group, Simon & Schuster and HarperCollins, have agreed to a settlement that is likely to overturn the their “agency” pricing model. Macmillan and Penguin Group USA, also named in the suit, have not yet settled.

So what is all the fuss about in particular? We previously detailed the controversy surrounding e-book pricing:

To build an early lead in e-books, and to promote the Kindle e-reader, Amazon Inc sold many best-sellers at $9.99 (often less than what they had paid!). Great for Amazon, bad for books? Publishers feared that consumers would get so used to cheap books that they would not want to purchase more expensive titles.

As Apple was preparing to enter the market with its first iPad in 2010, the game changed again. The late Steve Jobs, then chief executive, suggested moving to an “agency model” whereby publishers would set the price and Apple would take a 30% cut. Apple also designed the system so that publishers would not be able to let rival publishers sell the same book at a lower price. As a result, Amazon was forced to raise its prices. When prices are set, competition is forced out and the consumer loses, anti-trust allegations usually appear.

This appears be a major victory for Amazon, who has seen its market share erode from nearly 100% to 60%, and for Kindle owners, who might soon benefit from lower e-book prices. But Amazon may not want to gloat. The fact that the Kindle only supports purchasing content from Amazon’s store, and no other, may be ipso facto cause for review (unlike the Apple devices that support several competing book store apps).

Like Standard Oil before it, Apple has been the most valuable company in the world (a distinction that it alternately exchanges with Exxon Mobile, itself a product of the original Rockefeller oil break-up). But is Apple really monopolistic? What an ironic question, given all the years that Apple struggled against the domination of Microsoft and “Wintel.” Here is what the figures say about the Cupertino company’s market share:

It generates three-quarters of the music download trade, via iTunes,
It occupies sixteen percent of the global smart-phone market (up from 10.9 percent a year ago),
It is the third largest manufacturer of computers in the US (behind HP and Dell who both sell at much lower price points), and
The Apple App Store is set to scoop up three-quarters of a mobile app market worth $3.8 billion

These numbers certainly indicate that Apple has built an incredibly strong experience linking the hardware it sells (iPhones, iPads, Macs) to valuable content. But Apple’s strength in music and apps must be combined with the fact that, with the exception of tablets, it still isn’t the biggest player by unit sales in either phones or personal computers. This indicates that, in contrast to the Microsoft of the past, Apple is just better at designing the user experience on its hardware (both of consumers and content developers) to spur transactions. It has created the longed for “virtuous cycle” where more commerce begets more commerce.

On the other hand, when Microsoft faced a series of civil actions by the Department of Justice and 20 states back in the 1990s, the central issue was whether Microsoft should be allowed to bundle its browser, Internet Explorer (still the most widely used Internet browser), into its Windows operating system. At the time, Microsoft Windows was the standard operating system for over 90% of personal computers. As we disclosed above, Apple does not enjoy such platform domination. By their very nature, iTunes and the App Store are selling mostly third-party content to Apple’s users, not content created by Apple, of Apple and for Apple consumers, as Microsoft was allegedly doing by exclusively bundling Internet Explorer by Microsoft with Windows, of Microsoft, on Wintel computers – for Microsoft consumers.

As Rockefeller alluded, at some point, isn’t an anti-trust suit just a sign that a titan has reached the highest level in capitalism’s ultimate game? Should such winners wave the subpoena’s like big “we’re number one” foam fingers? It certainly seems so, as the largest and most successful companies of the current era take turns under the klieg lights of regulatory scrutiny.

For example, Google is also currently under pressure on Capitol Hill and in Europe. The Washington Post editorial states the situation thusly: “Getting grilled on Capitol Hill has become a rite of passage for many big companies that draw scrutiny.” In Google’s case, its dominant share of the search market leads to questions whether it has undue influence over what users find and don’t find on the Internet. Further, as Google branches out into other services — including maps, travel, shopping and deals, other companies are accuse the search giant of favoring its own content in search results. Yet, if anything, the rise of Facebook and social “likes” for product discovery probably does as much as anything to evidence the dynamic nature of creative destruction in business and the challenge faced by any regulatory attempt to engineer markets.

While the government goes after Apple, recall that it is Amazon that actually has 60 percent market share in the e-book category. It was Amazon, not Apple, that was the first mover to successfully generate significant e-book sales, with its Kindle readers. Apple actually stepped into the e-book breach late with its iPad and attendant e-reader apps. A real head-scratcher in all of this is the fact that Apple, unlike Amazon, enables all of the various competitors (including Amazon!) to sell e-books on Apple devices via third party apps. So, isn’t the private market sorting this out on its own?

The answer is “yes” and “no.” The Justice Department has a point regarding collusion and price fixing. But it is a mistake to read this action as saying that Apple is a monopoly and in line for gilded age trust busting, ala Standard Oil.

The most dominant companies will often eventually attract anti-trust scrutiny. That is as it should be. The question for Apple and its investors is how much worse will it get? Is Apple the Microsoft of this generation, or does constant innovation and investment in the next new thing limit the danger posed by any one fearsome giant of a company?

Whether or not the government wins the e-book case, Washington would be wise to tread carefully down the path of interfering with dynamic, technology-driven markets. A little more than a decade ago, Apple was down and Microsoft was up. At that time, Google didn’t even exist, Amazon was a tiny startup and the Facebook founders were school kids. Now, the tables are turned and what was up (Microsoft) is back to down to Earth — and that has almost nothing to do with regulation and everything to do with invention and competition.

Eva Arevuo also contributed to this article.