Thursday, 11 June 2009

Taking a bite out of Apple

Apple are in the news again today. The first story that caught my eye was that O2 is to charge an extra monthly fee for iPhone tethering. It plans to charge a whopping £15 per month when the new iPhone 3G S models come out, and the base contract cost will also increase for the new model. At first one has a tendency to blame O2, but if you really think about it, the bad guy here is Apple. Apple has mastered a very non-consumer-friendly "exclusivity deal" with O2, and O2 had to bid a lot of money to get the deal. This cost is being passed on to O2 customers.

I actually think that what Apple has done with O2 should be made illegal across the EU and that they should be fined. The French competition agency ruled the Orange-Apple exclusive deal anti-competitive and illegal back in 2008, and the Germans made a similar decision in 2007. The EU needs to stamp out this practice, and soon.

The second piece of news that I noticed this morning, was a story about a criminal gang that published their own songs, but then bought them via iTunes (and Amazon) with stolen credit cards. Notably, the gang made $300,000 from the royalties on $750,000 of sales.

If you do the math, that's a 40% return for the gang. The real crime is that Amazon and Apple earn the other 60%. Previous estimates have suggested that Apple's iTunes profit margin is around 30%. Have I missed something here, or are these two figures vastly different?

So in summary, the British authorities do not see a problem with Apple and a mobile operator openly colluding to restrict competition and fix prices and Apple are taking a rather nice cut on iTunes sales, passing 40% to the producers.
Posted by Ben at Thursday, June 11, 2009
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1 comments:

  1. In response to an email I sent to the Office of Fair Trading (UK), the following answer was given as to the lack of action taken to protect consumers using such practices:

    Thank you for your email of 10 June concerning the exclusivity arrangement between Apple and O2 with regard to the iPhone.

    By way of background, the Office of Fair Trading (OFT) is responsible for making markets work well for consumers. We achieve this by promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive. Our primary duties include the enforcement of competition law, and the application of consumer protection legislation in respect of matters that adversely affect the collective interests of UK consumers.

    The main law covering competition in the UK is the Competition Act 1998 (the Act). In brief, the Act contains two prohibitions. The Chapter I prohibition prohibits price fixing or other anti-competitive agreements which prevent, restrict or distort competition. The Chapter II prohibition prohibits conduct by companies which amounts to an abuse of a dominant position.

    The type of arrangement you have brought to our attention is a very common practice within the mobile technology and services market, as newly released handset products are often only made available on particular networks.

    This practice is not prohibited under the Act unless it leads to a significant reduction in competition. This is because the arrangement occurs between companies operating at different parts of the supply chain (in this case a manufacturer and a network provider). It is only if market power is present at one or both parts of the supply chain that the behaviour may be caught under the Chapter II prohibition.

    As stated above, we can only consider such arrangements if they lead to a significant reduction in competition. The iPhone is one of a number of high-end mobile handsets currently available on a number of contracts through alternative network providers and retail outlets. On this basis, the exclusive distribution arrangements between Apple and O2 do not appear to significantly affect competition in the supply of mobile communications products.

    With regard to your comments on the actions in the French and German courts, whilst we are aware of these cases, it is important to note that market conditions and legal systems in France and Germany differ from those in the UK.

    In particular, we note that France has only three network providers with Orange, having a market share of over 40 per cent, being the largest provider. However, in the UK there are five network providers and although O2 is a leading network provider, one of its competitors, Vodafone, is of a similar size.

    In view of the above, the OFT will not be taking any further action in relation to your concerns at this time. We appreciate the time you have taken in bringing this matter to our attention. Our intention, at this time, not to make further enquiries into this complaint does not preclude the OFT from revisiting the matter should further information come to our attention.
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