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Since when is Apple owning the App Store a problem?

March 11, 2019 - 00:07 -- Admin

I don’t mean to be spending time critiquing Elizabeth Warren per se, I kinda like most of her policies but this antitrust stuff is just crazy.

Now, in an interview with The Verge, Warren takes aim at breaking up Apple. Yes, Apple. And in a way that it is pretty surprising. She wants to have Apple either (a) divest the App Store or (b) stop selling its own apps (all of them!)

If you run a platform where others come to sell, then you don’t get to sell your own items on the platform because you have two comparative advantages. One, you’ve sucked up information about every buyer and every seller before you’ve made a decision about what you’re going to to sell. And second, you have the capacity — because you run the platform — to prefer your product over anyone else’s product. It gives an enormous comparative advantage to the platform.

The theory here is stock standard competitive harms from vertical integration. And I, for one, think those harms can arise. But not per se. It depends on context and observed behaviour.

So let’s revisit the theory — if you own a monopoly element (in this case, Warren would argue that is the App Store) and you compete downstream (in this case, selling apps), then you have an incentive to set pricing conditions on the monopoly element that are are worse for your competitors downstream so that you can drive more sales to your own downstream products. For instance, if you have an app, A, that is priced at p downstream and it competes with a third party app, B, also priced at p, then if you charge the third party a share, s, of their revenue but don’t charge your own, your profits are p if you get a downstream customer to buy your product and sp if they buy the competitors. So you would prefer them to buy your product.

The question then is: how are you going to achieve this? You could drop your price of app A. But that will only cause B’s price to fall as well. If that occurs it is good for consumers, not so great for the third party and completely self-defeating for the monopolist. Indeed, when you think about it, your incentives are to increase price rather than decrease them — aka the monopolist’s playbook. That’s good for third parties although maybe not for consumers (but we will have to see if vertical separation helps).

The only way, A can gain an advantage is by so crimping the third party app such that it exits the App Store. In other words, for A to use its vertical power, it has to end up excluding competitors.

Now let’s look at the evidence. Where oh where are Apple actually excluding competitors in the App Store that compete with its own apps? To be sure, it has excluded apps on various grounds but to my knowledge Apple never had a competing app so it was for other reasons. When Apple does have its own apps, for the most part they are free. That means they are in the world of earning less profits from having their own apps rather than more unless those free apps are excluding others. Is there any example of this? I mean any? When it embedded Reader in Safari that did not do anything to Instapaper or Pocket. When it pre-installed Maps, which paid app was it excluding. When it gave away Pages, Keynote and Numbers for free, did that end up excluding Microsoft Office? Indeed, the likely reason for all of this stuff was that (a) Apple believed it could produce better apps than others in those segments and (b) that it would improve the iOS platform overall because that is actually where it earns its money.

Suppose that, anyway, you forced Apple to divest its app store. Then what would happen? Absolutely nothing! Apple aren’t selling apps so the new owner of the App Store will get nothing from them as they are all free. Apple still make money on devices with iOS and will continue to do so. And who is going to control the developer software — Apple that’s who. The only place, there may be a difference is with Apple Music or new subscription like app services Apple might offer. But as Netflix have shown, you can be free on the App Store and earn that money outside of that.

In summary, never have I heard an antitrust proposal that makes so little sense as Warren’s proposal to separate the App Store (which Apple invented) from Apple. There is literally no one who is easy to identify that might benefit from this. I know they want to get away from consumers as the beneficiaries of antitrust policy (a controversial notion that I don’t want to talk about here) but if you do so, someone should benefit. Please, name that person!