Jerry Brito

Turns out Apple’s walled garden susceptible to market pressure and political pressure

A couple of news items this week have vindicated some opinions I’d previously expressed here, and they’re all about Apple, so how can I can pass up the opportunity to note them, right?

A while back I wrote that as long as iOS devices had a standards-compliant browser, innovation would be safe:

Apple has come under fire by some supporters of an open internet and open software platforms such as Jonathan Zittrain and Tim Wu, who argue that Apple’s walled garden approach to devices and software will lead us to a more controlled and less innovative world. In particular, they point to the app store and Apple’s zealous control over what apps consumers are allowed to purchase and run on their devices. Here’s the thing, though: Every Apple device comes with a web browser. A web browser is an escape hatch from Apple’s walled garden. And Apple has taken a backseat to no one in nurturing an open web.

This week comes word that the Financial Times, unhappy with having to give Apple a 30% cut of it’s subscription revenues, has dropped its iOS app in favor of a web app. Read the story; it’s quite interesting. As far as I can tell, the web app, written in cutting edge HTML5, is as good as the native app.

The second piece of news is that Apple has quietly backed down from its controversial requirement that an in-app newspaper or magazine subscription be the “same price or less than it is offered outside the app”. “Apple also removed the requirement that external subscriptions must be also offered as an in-app purchase.”

What this tells me is that the market works, and when companies make boneheaded moves, they can’t force users or publishers to go along with it by sheer will. Back when the subscription issue was blowing up I wrote that Apple did not have the market power to make this stick:

Digital publishing is very much a contestable market. I hardly need to point out that the day after Apple’s announcement, Google made public its own very competitive subscription service. And while the iPad is ahead of the game right now, Android tablets are only now beginning to hit the market. If declining iPhone market share is any indication, Android will nip at Apple’s heels in the tablet space as well. And let’s not forget other formidable (and somewhat-formidable) competitors in the likes of HP’s WebOS, Microsoft-Nokia, and RIM.

Let’s now talk about the real threat to app innovation. There’s news today that Apple has finally caved in to political pressure from members of Congress and banned DUI checkpoint apps from the app store. RIM had already complied, and Google has yet to respond. You can see, though, how apps are more susceptible to nanny state meddling than to monopolization.

Is Apple’s digital subscription plan good or bad for consumers?

There has been much hand wringing about Apple’s new in-app subscription system for publishers and even one report that antitrust enforcers have begun looking into the matter.

The purpose of the antitrust laws is to protect consumers, not companies, so the simple fact that Apple will take a 30% cut from publishers who want to offer subscriptions on iOS devices should not be enough to trigger scrutiny. So, my guess at what a theory of consumer harm against Apple might be is this: Apple not only takes a 30% cut of any subscription purchased in-app on an iOS device, it also requires publishers to offer as low a price on iOS as they offer anywhere else. Therefore, a case could be made that a publisher faced with Apple’s 30% fee (and unable to simply raise prices by 30% just on Apple’s devices) might raise prices on all platforms enough to cover Apple’s cut. So, assuming market power of course, Apple’s new policy could affect all digital subscription pricing.

Yet it’s hard to talk about market power in such a nascent sector. Digital subscriptions didn’t exist 5 years ago, and they do now in large part thanks to Apple. The right market structure is sorting itself out right now and yes, Apple does seem to have a well-earned lead as the innovator in the space. But if the original Mac taught us anything, is that a lead in a nascent sector is no guarantee of monopoly and regulators would be creating serious disincentives to innovation if they meddle.

Digital publishing is very much a contestable market. I hardly need to point out that the day after Apple’s announcement, Google made public its own very competitive subscription service. And while the iPad is ahead of the game right now, Android tablets are only now beginning to hit the market. If declining iPhone market share is any indication, Android will nip at Apple’s heels in the tablet space as well. And let’s not forget other formidable (and somewhat-formidable) competitors in the likes of HP’s WebOS, Microsoft-Nokia, and RIM.

Moreover, while the consumer harm is speculative, the potential consumer benefits of Apple’s subscription service are pretty clear:

• Ease of Use & Security: Apple’s app store is a tremendous innovation if nothing else because it creates a simple payment system consumers trust. iPad users will tell you they much prefer one-click subscriptions managed through Apple than having to create many accounts with disparate publishers, which incidentally improves security.
• Privacy: One thing that sets Google’s offering apart from Apple’s is that they will share with publishers information about subscribers. Apple, on the other hand, gives users the choice of sharing information with publishers, and then it’s only limited information. This should please privacy conscious consumers.
• Subsidized Devices: As a recently viral article in Wired suggests, the reason Apple is able to offer the iPad entry price of $500 (which rivals are having a hard time meeting) is that Apple is a vertically integrated company. This means that the 30% from subscriptions potentially subsidizes the iPad’s low price, thus benefitting consumers.

ITA: Too good to be acquired?

A coalition of online travel sites, including Kayak, Expedia, and Travelocity, has recently formed in opposition to Google’s purchase of travel search services firm ITA, according to the WSJ. The group is “launching a lobbying blitz on Capitol Hill, making the case to members of Congress that the deal would allow Google to dominate the online air-travel market by giving it control over the software that powers many of its rivals in the travel search business.” Microsoft also opposes the deal, noting that its Bing search engine relies on ITA information. Alas, I don’t think we’ll ever see an end to corporations trying to use the antitrust laws to protect themselves with no benefit to consumers.

Let’s be clear about what exactly ITA is, which is a search company. Airlines publish their flights, inventory, prices, and fare rules to computer reservation systems like Worldspan, Sabre, and Apollo. What ITA brings to the table is search technology that lets users sift through that information to find the best flights to suit their needs. They have developed industry-leading algorithms that look at the fare rules and pricing and show you what different flights can be combined to offer the best fare. ITA does not sell anything to consumers. Instead, they license their search technology to companies like Kayak and Orbitz. Unbeknownst to consumers, they use the ITA search engine on those sites and book there.

**ITA does not control any necessary input.* There is no barrier to entry for new competing travel search services firms. They just need to get the flight data from airlines or computer reservation systems. In fact, there are several other competing firms. ITA just happens to be the best one. And there is no guarantee that it always will be. A day after Google acquires the company, some small developer in a garage may unveil a competing algorithm that blows ITA out of the water. That is what is so wonderful about the internet. So what incentive will innovators have if they know that if they become too successful, their clients will incite the state to prevent them from cashing in on their hard work? What incentive will the Bings of the world ever have to innovate or acquire better travel search technology if they can get the government to guarantee them access to the best?

Congress, don’t fall for it.