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The FTC Targets Apple Music: Part I

When launching a new product, the goal is to create excitement, as any company will tell you. But Apple’s newly launched music streaming service, Apple Music, may be generating more excitement than desired. According to a report in The Washington Post, the Federal Trade Commission has launched an investigation into Apple’s treatment of competing music streaming apps sold in its mobile App Store.

The controversy stems from Apple’s requirement that any company selling digital goods through iOS, its mobile platform, use Apple’s In-App Purchase interface (IAP), which restricts sellers’ offerings in several important ways. Apple Music, however, is exempt from these restrictions. Therefore, while Apple Music and rival music streaming services are on equal footing when competing for users of desktop computers, laptops, and Android smartphones, these services play by different rules within Apple’s iOS ecosystem.

Although a number of Apple’s rules have come under scrutiny in recent weeks, the most controversial is the “Apple Tax,” a 30% cut that Apple takes from all purchases made through its App Store—or through any iOS apps offered in its App Store. In other words, whenever an Apple Music competitor sells a subscription through its iOS app, it owes 30% of its revenue to Apple. Consequently, any competitor to Apple Music wishing to sell subscriptions through its iOS app must choose between charging the same $10/month fee as Apple Music and putting itself at a financial disadvantage or charging a greater fee and putting itself at a competitive disadvantage. In practice, high costs have led most to choose the latter option; rival services Spotify, Rdio, Rhapsody, and Tidal have all raised the price of subscriptions sold through their iOS apps by 30 percent, from $10/month to $13/month.

Users of these services can still pay the normal, $10/month price if they purchase their subscription on the service’s web site instead of through its iOS app. But Apple’s prohibition against apps “that link to external mechanisms for purchases or subscriptions to be used in the App” has made it difficult for rival services to inform their users that these alternative methods of purchase exist.

Spotify, the market leader in music streaming, recently struck back, sending its iPhone customers an email PSA explaining that they can save money if they set up their payments through Spotify.com instead of through iTunes. Whether this move will counter the “Apple Tax” by informing users of other payment options remains unclear.

The lack of features in Apple’s IAP, which companies that wish to sell in-app subscriptions must use, has also made it impossible for rival music streaming services to offer free trials or special pricing for families through their iOS apps. In contrast, Apple currently offers a three-month free trial, which it advertises prominently on the front page of apple.com, as well as a discounted plan for families. As with the “Apple Tax,” rival services can offer free trials and family plans to users who buy subscriptions outside of their iOS apps—but cannot advertise these outlets inside their iOS apps.

These restrictions, along with the maligned “Apple Tax,” have burdened music streaming services looking to sell to iOS users for some time. But these barriers weren’t considered a serious threat to competition because they affected all music streaming services equally. Now that Apple has entered the music streaming market, exempting itself from the requirements imposed on its competitors, some have raised questions about the prospect of Apple’s “monopoly” in the iOS ecosystem threatening competition in the music streaming industry. These questions, which I will examine in future essays in this series, include:
  • Do Apple’s actions pose a significant threat to competition in the music streaming market?
  • Are Apple’s actions economically beneficial?
  • To what extent are “iOS users interested in music streaming” a distinct market, separate from the broader market for people interested in music streaming at large? That is, are there separate markets for music streaming on iOS devices, music streaming on Android devices, and music on laptop or desktop devices, or are these indistinguishable parts of a larger market for music streaming in general?
  • To what extent does competition in the U.S. equipment market for smartphones, of which Apple has only a 43 percent share, constrain Apple’s power to act anti-competitively in its own iOS ecosystem?
  • Is the FTC likely to take further action against Apple?

Part II of this series, coming soon, will look at Apple’s actions from an economic perspective and discuss both why these actions are unlikely to pose a significant threat to competition in the music streaming market and why these actions may even promote competition in the smartphone market.

The FTC Targets Apple Music