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Apple Subscription Plan Is a "Call Me" Note to Regulators, Litigators

Apple (AAPL) and other Silicon Valley companies such as Google (GOOG) and Facebook have begun to hire Republican-aligned lobbyists in anticipation of a D.C. political shift. For most of the companies, ambivalence is a sign of commercial maturity.

It couldn't come at a better time for Apple, which has recently specialized in moves that couldn't be better designed to catch the attention of regulators. Some of Apple's latest actions, intended to forever tie customers to its apron strings and cut other business off from selling to consumers, are likely to wave more red flags in front of the FTC -- and could draw lawsuits from business partners as well.

iPad subscriptions
The move getting the most attention is the new subscription service in Apple's App Store. Publishers can set the length and price of a subscription. They can sell directly to the customer, but they also have to provide an App Store link with the same terms. If Apple processes the sale, it gets 30 percent of the deal. Publishers are unhappy with the thought of giving up that much revenue and, even more, losing the customer data that is a driving force in their marketing. Here's the official Apple line:

"Our philosophy is simple -- when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing," said Steve Jobs, Apple's CEO. "All we require is that, if a publisher is making a subscription offer outside of the app, the same (or better) offer be made inside the app, so that customers can easily subscribe with one-click right in the app. We believe that this innovative subscription service will provide publishers with a brand new opportunity to expand digital access to their content onto the iPad, iPod touch and iPhone, delighting both new and existing subscribers."
That statement is nonsense. The app and content bring the subscription. Apple provides is a fulfillment service and insists on its own in-app sales link, which is nothing more than shoving the publisher out of the way.

Mac app store
Apple has also opened an app store for the Mac. Although similar in form to the iPhone/iPad App Store, an independent Mac market already existed. Apple has said that Mac owners don't have to buy from the app store. However, simply by introducing its own sales channel, Apple will have a serious impact on existing businesses.

Famous former Apple executive Jean-Louis Gassée points to such disruptive results as radically lower prices of software and more generous terms for installing on multiple machines. That would just be competition if Apple didn't own the iOS and Mac ecosystems. More on that in a minute.

Foiling jailbreaks
The action getting less attention is Apple's attempt to discourage people from jailbreaking their phones, which means freeing them from Apple's restrictions and enabling installation of non Apple-sanctioned apps. The company cripples iBooks for some types of jailbreak exploits (though not most, at least not yet):

Since using the greenpois0n jailbreak, I have been unable to open some of my iBooks that I rightfully purchased from the iBook Store. I thought it was a problem with the downloaded books, so I re-downloaded them. That didn't work so I removed the iBooks from my iPhone and re-sync'd them from my computer-- still no luck.
As the post's author learned, it was an intentional block by Apple. So the person had paid for their content, but still couldn't access it.

Are there potential legal problems?
According to the U.S. Copyright Office, jailbreaking an iPhone is legal. Courts have long held that people who buy products can do as they wish with them, including modifying them. As is true with other companies, Apple can void a warranty. Block access to material already granted? Maybe, if the license is written with the explicit exception. But it gets sticky.

Apple also faces potential challenges over its control of third-party software sales on its platforms. The subscription plan alone raises legal issues. Apple has controlled partners' business activities all along. But in this case, the placid facade cracks. Music service Rhapsody says that the rules are "economically untenable" and is talking with other music services, with legal action a possibility. Throw in large media companies with legal resources and a possible challenge is more likely.

Some, like Matt Rosoff on Business Insider argue that such talk is silly:

As both the professors quoted in the Journal piece note, any antitrust claim would have to start by proving that Apple has a dominant position in the relevant market. Right now, it's not even close.
However, reality is not so clear-cut:
"Millions will be spent litigating how broad the market is," said Herbert Hovenkamp, an antitrust professor at the University of Iowa College of Law.Mr. Hovenkamp said digital media is the most plausible market. He said he doubted that Apple, currently, has a sufficiently dominant position in that market to warrant antitrust scrutiny.

But, he said, if Apple gets to a point where it is selling 60% or more of all digital subscriptions through its App Store, "then you might move into territory where an antitrust challenge would seem feasible."

Companies could make the case that overall market share didn't matter, as Apple had a literal monopoly on those who own iOS devices, even though the hardware is written to run third-party software. The Robinson-Patman Act, the first federal law prohibiting price discrimination, came about because "large retailers could use their market power to extract price concessions from manufacturers and other sellers that were unavailable to their smaller competitors."

Apple is a retailer that prohibits smaller competitors. It's a step beyond the 1936 conditions. One could argue an analogy to the movie industry vertical integration that led to the 1948 Supreme Court decision in United States v. Parmount Pictures. Control over distribution can become an antitrust issue. This isn't a black-and-white issue any more than market dominance, but it could be there.

The company could argue that it has a legitimate business reason to require the tie-in, but that would be hard to defend. Why is financial control necessary if Apple traded on the ease and safety reputations of the Mac for so many years? If there is no reason to forbid an outside link for a subscription, what is the business reason, other than wanting a slice of the transaction, to insist on the Apple alternative?

MG Siegler calls this "one of the boldest bets Apple has ever made," and I'd agree. If publishers or app vendors start an action, winning isn't a slam dunk. Neither is Apple's defense. The conflict could attract regulators in the US, and possibly beyond. That could be a big downside. Just ask Microsoft (MSFT) or IBM.

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