The smartest take I’ve seen on Apple v. Pepper

“To be frank,” writes Ben Thompson, “Apple is an abusive monopoly in terms of iOS apps.”

From Antitrust, the App Store, and Apple, posted on Stratechery Tuesday morning:

If I am right, and the case is dismissed because the plaintiffs do not have standing, that does not mean Apple and the App Store are out of the antitrust hot water…

Apple has every right to the outsized profits it makes on the iPhone. Consumers could buy cheaper Android devices but they don’t because they value Apple’s hardware, or iOS, or the integration between the two. I have a hard time believing, though, that anyone buys iOS because that makes it harder to buy ebooks!

To put it another way, Apple profits handsomely from having a monopoly on iOS: if you want the Apple software experience, you have no choice but to buy Apple hardware. That is perfectly legitimate. The company, though, is leveraging that monopoly into an adjacent market — the digital content market — and rent-seeking. Apple does nothing to increase the value of Netflix shows or Spotify music or Amazon books or any number of digital services from any number of app providers; they simply skim off 30% because they can.

To be clear, Apple absolutely did create the modern app marketplace, and, as the company loves to brag, an entire new economy full of new types of jobs. That, though, is precisely the problem: the App Store is not a fun side diversion; it is one of the largest platforms we have ever seen, on which hundreds of thousands of people are seeking to build real businesses, and that carries different types of responsibilities — and legal limitations — than an OS feature. It is bad for society generally and, I strongly believe, illegal for Apple to have crafted App Store rules such that it can leverage its smartphone share into monopoly profits on digital goods and services that are on iOS not because iOS is anything special, but because that is the only possible way to reach nearly 50% of the U.S. population.

My take: Agree or disagree with his take, Thomson has a handle on the economic forces at work here. That’s more than I can say, based on yesterday’s back and forth, about the nine justices who will decide this strange case.

13 Comments

  1. Rick Raphael said:

    I buy Apple products specifically BECAUSE of the walled garden of iOS. Gave up on Win in ’92 because I got tired of the security hacks. I still have to run Win for two apps which are in a Windows partition on a MacBook Pro, but the Win OS has no email account and it’s never used for browsing.

    I choose to pay the Apple software premium because I don’t have time for Mickey Mouse software. Others have the same option. At least until the Supremes put their boots on my neck.

    8
    November 27, 2018
    • Matt Tanase said:

      +1 Every week there is a story about a massive Android data leak due to a 3rd party app. It seems absurd to bring up anti-trust/monopoly themed arguments when there is a completely acceptable, cheaper alternative with a larger customer base in the form of Android. Those who value privacy and security opt to pay more for the iOS app store.

      4
      November 27, 2018
  2. Jonathan Mackenzie said:

    “Apple does nothing to increase the value of Netflix shows or Spotify music or Amazon books or any number of digital services from any number of app providers; they simply skim off 30% because they can.”

    This is simply wrong. I know when I buy an app from the App Store that Apple has vetted it. Our smartphones increasingly contain our entire lives. It is entirely appropriate for Apple to take control over the kinds of things software is allowed to do on their devices. Even with these precautions, I know that the occasional security violation can sneak through at least for a little while. I can’t imagine how uncomfortable I’d be running software that Apple had not signed off on.

    And some may try to make the argument that if I want vetted software I can continue to use the app store, but others should be allowed to use other sources. I don’t buy it. If malware becomes common on iPhones in the wild, this eventually poses a risk to even secure iOS devices running only approved apps.

    I agree with Rick. Software security justifies the walled garden. To assume that Apple can allow everyone to put any app on their phone and still provide a secure device to its customers is fantasy. And when folks are made miserable by some scam or breech, Apple will take the blame for not making iOS more secure. It’s ridiculous.

    6
    November 27, 2018
    • I took the liberty of forwarding your comment to Thompson. His terse reply, via e-mail:

      “Taking 30% of an ebook sale has nothing to do with security.”

      If you want to engage with him further, you can e-mail him directly at [email protected].

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      November 29, 2018
  3. Steven Noyes said:

    While I agree with most of what Ben writes, I think he fully missed the mark on the primary tentpole of his discussion:

    “Apple does nothing to increase the value of Netflix shows or Spotify music or Amazon books or any number of digital services from any number of app providers; they simply skim off 30% because they can.”

    I can watch Netflix on either the open web (on my Mac) or the Netflix App (iPad). Quite frankly, the Web Interface is … what is the word … [email protected] Apple has greatly enabled Netflix to improve on the interface, delivery reliability and overall quality by using the native iOS app. Yes, the movie is the same but the control is substantially nicer in the Netflix App. Likewise, the overall increased security on the “trusted” app design of iOS is far better for the vast number of consumers when compared to the cluster F Windows 95 was.

    Given these are Ben’s primary tentpole in his argument, I find his conclusion highly disingenuous.

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    November 27, 2018
  4. Gary Morton said:

    This situation with Apple and the App store seems quite similar to the situation with any major retailer. Walmart creates a space for customers to shop. Suppliers compete heavily to get their goods into the Walmart stores. Walmart marks up the goods that come into the store so they make a profit. Very similar to the App store? Walmart, having the deep pockets, has to vet the fresh foods that come into their store. Because if people get sick or die, they will sue the grower, the processor, and Walmart. A significant difference in the business model is that Apple is simple and transparent in their mark-ups and gives app developers the control of their pricing. The markup is a simple 30% and that is it. Realizing that Netflix, HBO, and others probably get some other lower, negotiated rate.

    Walmart has a huge capital investment into the infrastructure of having stores and they are able to deliver profits because people want to go there to shop. Apple has huge investments into developing a platform for Apps to run and a place to buy them.

    I suppose some would argue that Walmart does not sell a platform that requires consumers to buy from Walmart. Although, Apple does not really either. If you don’t want the vetting from the App store and the guarantee that the next iteration of the operating system will support the apps you buy, you can simply jailbreak your phone and have what every Android user has–a non-upgradeable, virus and malware prone, mess.

    3
    November 27, 2018
  5. Fred Stein said:

    In this case, Ben is just wrong, and for many reasons.
    1) No monopoly. You can buy Android or jail break your iPhone. In both cases you lose the safety (as in protecting your financial accounts and other personal data that malicious folks can get and do you real harm.).
    2) Compare this to a mall or a hotel. They control what is sold on THEIR property, and make a profit. The bottle of water in the minibar has an 80% profit, not 30%. Of course all hotels have ‘free lancers’ who offer pleasure and the risk of STD, a real virus vs computer virus.
    3) Apple’s profit of 30% is fair, in fact on the low side.
    4) Customers can download free Apps where the App developer makes their profit, but NOT through the sales of the App. This is the model for nearly all of the ride or room or photo sharing Apps and social media. It’s also the model for nearly all financial services. Those revenue streams dwarfs the revenue in all App Stores, iOS and Android.
    5) Finally: What is the counter proposal? How does Apple give open access and still protect us, our children, or other family members? Can Apple create a model for the App Store that makes the 30% charge negotiable for millions of Apps?

    2
    November 27, 2018
    • John Konopka said:

      As a developer you could supply web-apps as one more way to benefit from Apple’s work without paying a fee.

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      November 27, 2018
  6. Gregg Thurman said:

    Increasingly Thompson is identifying himself as a click bait writer.

    Netflix pays Apple 30% for only those subscribers that subscribe via the iPhone/iPad app.

    If you subscribed directly with Netflix you can still use the iOS app, but importantly, Apple derives no revenue from your subscription.

    Additionally, if Apple were to lower Netflix’s fees, it would only enrich Netflix as Netflix would not lower its fees proportionately.

    For Apple’s 30% the consumer gets a single shopping point (vs searching the internet for obscure titles/developers) and curates accepted apps against malware and illegal activity.

    The suit was brought by attorneys looking for a fat fee, the “class” will get practically nothing for the “harm” they may have experienced. Which brings me to this: how much harm is there in being able to download secure, curated apps that range in price from free to 99 cents each? Apple incurs costs curating and delivering free apps, and derives zero revenue from them.

    From my own experience I have not paid for app services AFTER the download except for Spades (love the game). The bottom line is that no matter how small or large the fee is it remains my choice to avail myself of the “added” functionality/features. I make the value decision, not some other person.

    But then Apple was found guilty of illegal collusion with book publishers, while Amazon sells below cost, so anything can happen in a world where logic is not an issue.

    2
    November 27, 2018
  7. John Konopka said:

    Another way to consider this is the corkage fee charged by restaurants when you bring in your own wine bottle. You might argue that you can buy a bottle of wine much more cheaply somewhere else and the restaurant is abusing their power by not letting you bring in your own bottle. But you are using their facilities, their ambiance, security, HVAC, etc. You can judge whether this is a fair deal, but it doesn’t seem improper for them to charge something.

    Apple’s 30% is less than the amount most retailers keep.

    Corporations can directly download software to their employees. Besides jailbreaking, you can get source code and load that onto your device via Xcode.

    2
    November 27, 2018
  8. David Emery said:

    I suspect legally Apple is a monopoly. Whether it is an “abusive monopoly” depends on whether (a) there is a specific legal definition of ‘abusive monopoly’ (IANAL) and if not, then on a value judgement about the benefits vs damage of the monopoly.

    0
    November 27, 2018
  9. Stephen Young said:

    As a software developer seems to me the 30% for not only hosting an app, handling the transaction on my behalf, maintaining the market place, and continuously improving the tools for me to develop (look at AR, MR and Metal), is a big part of what the 30% covers. Also for subscriptions like Spotify and Netflix the 30% rate reduces to 15% after a year.

    0
    November 28, 2018

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