August 21, 2015 11:08 AM
This is the third in a series of essays on the FTC’s investigation of Apple Music. In Part II of this series, we demonstrated that, even if Apple were to ban rival music services from offering iOS apps, competition in the smartphone market would significantly mitigate any threat to competition in the music streaming market. This section will ignore this effect and look instead at how Apple’s actual actions, unhindered by consumers’ ability to switch phones, would affect competition in the music streaming market.
Recall from Part I that although Apple imposes several restrictions on rival music streaming services, these restrictions are largely illusory because they apply only to sales made through these services’ iOS apps. Any consumer can bypass them by simply purchasing their subscription through a service’s web site—or, for that matter, any channel other than its iOS app.
As a result, these restrictions should affect only a small subset of music streamers—those who (1) discovered music streaming through a service’s iOS app, (2) rely exclusively on iOS for streaming, and (3) haven’t learned that they can bypass Apple’s restrictions through some other means. In other words, the only consumers who would pay a higher price or be “unfairly” pushed towards Apple Music are those whose sole exposure to music streaming has come through Apple devices. The question, then, is whether Apple should have an advantage among consumers whose sole exposure to music streaming has come through the ecosystem it developed.
August 3, 2015 2:14 PM
This is the second in a series of essays on the FTC’s investigation of Apple Music. Part I discussed the reason for the FTC’s investigation as well as the facts behind the allegations levied at Apple. This part will look at the situation from an economic perspective and examine the extent to which competition in the market for smartphones would mitigate any threat to competition in the music streaming market arising due to Apple’s supposedly anti-competitive actions.
Before we consider the competitive effects of Apple’s actions, it’s important that we investigate the extent to which the severity of Apple’s actions is even relevant. Consider the following thought experiment:
Assume that Apple were to unilaterally ban all music streaming companies from offering iOS apps, thereby granting itself a monopoly in the market for iOS music streaming. Would this pose a significant threat to competition?
The instinctual answer is, ”Yes! Obviously the act of outlawing competition is a significant threat to competition.” In reality, however, the question is more complicated. Although Apple has monopoly power in its iOS ecosystem, its need to compete with Android devices in the overall smartphone market limits the extent to which it can exploit this power.
Consider the “Apple Tax,” which, as mentioned in part I, is the 30 percent “tax” Apple imposes on all purchases made through its App Store or through any iOS apps. At the moment, this tax is significant but not unreasonable. But imagine what would happen if Apple were to begin raising it, to 50 percent, 70 percent, 90 percent. As it grew higher and higher, app creators would spend less and less time making apps for iOS, and any paid apps made would become progressively more expensive. Consequently, consumers would increasingly switch to competing smartphone brands (presumably those running Google’s Android operating system).
The extent to which a change in the price of one good can lead to a change in the demand for another is referred to as the cross elasticity of demand and is critical to understanding our earlier hypothetical. Here, we are interested in the extent to which an increase in the total cost of ownership of an iPhone—realized as an increase in the price of music streaming apps on iOS—would drive consumers to switch to competing smartphone brands. A greater cross elasticity of demand would indicate higher consumer willingness to switch and, thus, would suggest that Apple’s actions in our hypothetical are less likely to pose a significant threat to competition.
July 29, 2015 9:07 AM
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.
April 27, 2015 3:35 PM
CEI responded to the news that the Comcast-Time Warner merger failed. You can read more analysis from CEI's Vice President for Policy Wayne Crews here.
"The deck was stacked against this deal from the beginning: Comcast and Time Warner Cable had to seek permission to merge from not only the Department of Justice, but also the Federal Communications Commission. While the DOJ must win in court before it can block an acquisition, the FCC has unilateral power to send a transaction into regulatory limbo for years before the merging parties get a chance to be heard by an independent federal judge. This process turns the rule of law on its head, and only Congress can fix it."
-- Ryan Radia, Associate Director of Technology Studies
“The collapse of the Comcast-Time Warner merger merely because of the interference of government, not because of actual market rejection, illustrates the overwhelming power of the modern state to undermine the advance of communications technologies and services. These bureaucrats have decided on our behalf to award other communications industry companies a government-granted reprieve from the pressures of competition.”
-- Wayne Crews, CEI Vice President for Policy
April 23, 2015 5:17 PM
Today we’ve learned again that bureaucrats and their enormous kingdoms come before consumer welfare.
The collapse of the Comcast-Time Warner Cable merger merely because of the interference of government, not because of actual market rejection, illustrates the overwhelming power of the modern state in undermining the advance of communications technologies and services specifically in this instance, and of free competitive enterprise generally.
The proposed transaction was first announced well over a year ago, and as is now the unfortunate and disruptive norm, the parties had to await the verdicts of bureaucracies rather than set immediately about serving consumer markets. Now, the Justice Department’s Antitrust Division and the Federal Communications Commission, whose edicts change the direction of entire industries with the slightest gesture, have decided to derail the deal.
These bureaucrats have decided on our behalf that the merger wouldn’t help us. What they have really decided is that no competitor will need to react to the Comcast-TWC merger, and so competitors have been awarded a government-granted reprieve from the pressures of competition. Over and over, antitrust routinely harms consumers far more than any ordinary business transaction like this can ever do.
Sometimes mergers work, sometimes they don’t—like the failed AOL-Time Warner merger. But such matters should be settled in the marketplace, not by overlords in Washington who, if we are the slightest bit honest, are the real wielders of unchecked monopoly power over all industries, not just one sector like this.
For an earlier discussion of this merger, here’s a column of mine in Forbes. “Why Organized Conservative Opposition To The Comcast Time Warner Deal Misfires.”
On the folly of antitrust regulation (and it is regulation), see my formal comments to the Federal Trade Commission’s Antitrust Modernization Commission.
February 3, 2015 4:13 PM
Over the decades I’ve spent in this Heart of Darkness (a.k.a., the bowels of American politics), I’ve learned two lessons that have encouraged the steady politicization of the American economy:
- When the right time comes, I’ll take a principled stand (sadly, too often, once you’re no longer in office); and
- Of course, we know the “right” answer is often to liberalize current rules, but that would be politically naïve, so our goal should be to avert even worse rules (but, of course, sacrificing principle rarely assuages those favoring more government control).
And both lessons seem to have been forgotten in the Republican rush to avert the threatened action by FCC Chairman Tom Wheeler to transform the Internet into a federally regulated utility. Senator Thune, Representative Upton, and Representative Walden have proposed a “compromise” bill that would strip the FCC of its purported authority to reinterpret the Communications Act to consider the Internet as a “public” utility.
Unfortunately, their language concedes perhaps the most dangerous part of such a reclassification: removing the freedom of network owners to price their services. Well, actually not quite: the Republicans would remove providers’ ability to price in ways that some view as “discriminatory.” They explicitly mention pricing policies that might result in “throttling” (like congestion-managed toll lanes?), unreasonable “network management” (as decided by whom?), and “paid prioritization” (like that used for just-in-time transportation services by most transport companies?).
But proponents argue if FCC is left alone, its rules might even be worse. And, indeed, they probably will be—but FCC action would be administrative, reversible by a future administration or via inevitable legal challenge. If Congress—led by erstwhile opponents of net neutrality—accedes to forcing the Internet into quasi-utility status, the losses could be permanent.
Those contemplating this action should reflect on the consequences of similar regulation on an earlier network—the railroads. This was America’s first national network, knitting together then small town and rural America into the national economy. Railroads dramatically lowered transportation costs—changing the economy and resulting in growth in some regions, contraction in others.
September 16, 2014 3:31 PM
The U.S. Senate Committee on Commerce, Science, and Transportation has scheduled a markup for tomorrow afternoon of the Surface Transportation Board (STB) Reauthorization Act (S.2777). If enacted, the bill (specifically, Section 14) would threaten much needed investment in railroad infrastructure and reverse three decades of progress on railroad regulation.
Senate Commerce chair Sen. Jay Rockefeller (D-W.V.), irresponsibly joined by Sen. John Thune (R-S.D.), has for years sought to reverse the partial deregulation enacted by Congress over 30 years ago. Since 1980, when the Staggers Act was enacted, average real freight rates have fallen by nearly 50 percent, railroad employee productivity and safety have dramatically improved, and the industry is now healthy and reinvesting more than $20 billion of its own funds every year.
But hydraulic fracturing revolution has led crude oil shipments to skyrocket in recent years—since 2005, originated carloads of crude oil on major railroads have increased by more than 6,500%. With continued steady growth in intermodal movements, new capacity investments are needed to ensure America’s freight rail system remains the envy of the world. Unlike road and air carriers, the railroad industry owns and manages its own networks and uses its own funds for infrastructure investment.
While singling out the private railroad industry for its alleged sins, Sen. Rockefeller has often championed subsidies for other modes of transportation. West Virginia’s highway system has long been one of the most federally subsidized in the nation, and Sen. Rockefeller never misses an opportunity to protect wasteful taxpayer subsidies of government-owned Amtrak and the completely misnamed and unessential Essential Air Service.
August 20, 2014 4:42 PM
Does it make sense to require a park campground operator that has a few hundred employees at 120 different locations to come up with 120 separate affirmative-action plans, one for each site? Just because it also receives a measly $52,000 federal contract to clean bathrooms used by tourists (which it does very cheaply, at cost, in order to make its nearby concessions more attractive)?
To any economist, the answer would be “no.” But to the Obama administration, the answer is “yes.” If a federal contractor gets $50,000 annually from the federal government, or “serves as a depository of Government funds in any amount” or has “government bills of lading” worth $50,000, it generally has to have a separate affirmative action plan for “each of its establishments,” under a regulation issued by the Department of Labor in March 2014.