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Five Steps Apple Can Take To Dodge the FTC, Critics, and Naysayers

In previous posts, I've mentioned the potential of regulatory pressure that Apple (AAPL) faces from the likes of the FTC. Many think the tumult is overblown, but I disagree. In his quest for control over the iPhone ecosystem, CEO Steve Jobs has tied the hands of independent software companies, blocked retailers, and taken other anti-competitive actions. The irony is that even now he could keep the grip he has while putting off regulators, gaining developer loyalty and improving his company's competitive position.

Two conditions driving Apple into the attention of regulators: prohibition of iPhone app sales through third parties and control over how developers write their applications. I understand the argument that Apple wants to ensure a certain level of function and quality of iPhone and iPad applications. The stance is PR hokum, but it really doesn't matter. Apple can support that stated goal and, at the same time, eliminate the basis for regulatory interest and appear more open to and supportive of developers with the following five steps:

  1. Drop the retail exclusivity of the Apple app store.
  2. Drop technical restrictions on developers' choices of tools, while maintain the restriction on using private API calls.
  3. Reform the app approval process to focus on how software acts on iPhone OS-running devices, not how it's written.
  4. Create an "Apple Approved" label of approval.
  5. Modify the iPhone and iPad warranties to cover problems caused by third party software only if the software is Apple Approved.
The end of retail exclusivity and technical restrictions removes the potential for restraint of trade charges or lawsuits. How can you restrain trade when you don't tell independent companies how they create products or where they can sell them?

Continued restriction over developer use of Apple's private iPhone programming features keeps third party developers on an equal footing and avoids the use of undocumented features that might change and open the iPhone operating system to potential sources of instability. That said, all applications would still undergo Apple review. Apple would focus on how the applications work -- stability, how well they work, whether they appear as native applications or seem like reduced function cross-platform products, and if they replicate functions that are native to the iPhone.

Apple would then brand each app as either Apple Approved or not. The company's own app store would carry only Apple Approved software, ensuring the quality of customer experience. App developers could choose to sell their products through Apple, through third parties, or both, if the applications were approved. Those whose applications were unapproved could still sell their products through third party outlets or direct to consumers.

This would mean a change for Apple and slight increased risk of dissatisfied customers, but the downside would be minimal. The benefit of this approach rather than Apple's current one is that it lets the company keep effective control while appearing to relinquish all control. Apple can be as stringent as it wishes in the approved category, because it doesn't prevent individuals and companies from marketing their work. The vast majority of software vendors will want to be in the Apple app store, and so will work to make their applications compatible. The relative few that won't play ball, including those, like Google (GOOG), who might have an app that competes with iPhone OS features, won't matter to Apple.

Furthermore, Apple enables the ability for third party developers to be innovative. If something is a good idea, Apple can buy the company or adopt the approach for additional benefit to customers and to Apple. It would be a clear and defensible way around criticism and still give Jobs what he wants.

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