Consider the following situation. You are a producer of a certain fashion item (maybe, designer jeans). A clothing retailer opens up a store on the highly trafficked, High Street. They would like to stock your jeans but they insist on a low wholesale price even though they will price at full retail to consumers. You would prefer a higher price but your alternative is to sell the jeans yourself out of the back of your van and that can be hard. But the retailer also attaches another condition. You can’t sell your jeans in the vicinity of their store, whether to other retailers nearby or out of you van parked nearby. As that is something you were doing previously, the conditions worry you. But from the perspective to the retailer, it makes sense. If they face some nearby competition, then their ability to earn a high mark-up is compromised. So you are left with a stark choice: accept the retailers terms – low price/local exclusivity – or not. Clearly, you will only do so if the retailer sellers lots of units relative to your other local options.
Does this sound familiar? Certainly, if you are a publisher considering selling magazine subscriptions on any of Apple’s mobile devices (such as iPhones, iPods or the iPad). Apple recently announced their terms for subscription selling on those devices. First, they want a 30% cut of the revenues (the equivalent to a low wholesale price). Second, they will not allow publishers to include a link inside the app to an alternative payment option (the equivalent to restricting you from parking your van in the store’s lot). Third, they will require that if you sell the subscriptions elsewhere (at least for iOS devices and perhaps any digital version), that the retail price be no lower than what you tell Apple to charge. This last one is not quite an exclusivity requirement. You can supply another retailer but just don’t give them a better deal than you give Apple. So just as the retailer in the jeans example, Apple want to earn a high margin given the traffic they generate and they need to impose restrictions so that their work in generating that traffic isn’t siphoned off. If publishers don’t believe Apple can generate more traffic, they shouldn’t accept the deal.
Publishers are not, however, happy with Apple’s terms. They claim that a 30 percent reduction in their revenues is uneconomic. Of course, unlike the jeans seller in our example, publishers can set their final subscription price. If you charged $10 per month before, you can still earn $10 per month by charging around $14.29 now. The problem is that this will lose you sales; not just on Apple devices but for other digital subscriptions. If Apple are the way of the future, that might be fine but if not then publishers have a dilemma. That said, making publishers accept this bargain is not an obvious win for Apple. They are betting on being the dominant platform. If they are not, then their terms will not be acceptable. Moreover, if enough publishers resist, then Apple will potentially miss out on the market entirely.
Interestingly, this is all not just a strategic issue. It is now potentially a policy issue too as antitrust authorities (the US DOJ and FTC and the EU) take a closer look at Apple’s pricing and terms. There are two aspects that might raise antitrust concern: (i) Apple’s exclusivity-like requirement that no external payment links be permitted in apps and (ii) Apple’s most-favored customer clause preventing discounting on other platforms. Let’s examine each in turn.
Exclusivity can be an issue as it might harm other platforms that might want to sell digital subscriptions. If Apple’s exclusivity means that those platforms cannot generate sales, then a monopoly platform may arise or be sustained. But that is the issue here: where is Apple’s monopoly? It is arguable that Apple has a monopoly over tablet devices and has had that monopoly now for almost 11 months since it first released its iPad. But if a publisher decided not to sell subscriptions for iPad users, it would have other options: particularly the options it had prior to April 2010; web based subscriptions and eReader subscriptions, not to mention physical subscriptions that fall outside of Apple’s terms. It would have to be demonstrated that the iPad was one of the few or the only way to access a particular customer class to believe that publishers were excluded by Apple’s terms. In any case, those terms are not strictly exclusionary as they do not prevent other digital subscription sales – even for iPad access. Instead, they at worst, raise the costs of those other sales. To be sure, raising costs can sometimes be an antitrust violation but the degree of market power a firm would have to possess to make that the case has to be proportionate. Right now, that case appears weak.
Most-favored customer clauses arise when the terms of one supply contract impose conditions on other contracts a party might enter into. Apple is effectively preventing discounting elsewhere. If it did not do this, then that discounting would occur and Apple may be unable to generate as much in sales. Worse than that, Apple may do the hard work of signing consumers up for initial subscriptions only to have those same consumers contacted outside of those arrangements with discounts.
But such clauses can have the effect of raising prices in the market and this is what might concern antitrust authorities. For this to be likely to occur here, Apple must have a requisite degree of power (so that publishers are forced to accept those terms) and it must be the case that prices actually rise. It is too early to tell but if Apple is right and iPad consumers really do purchase more, then it is possible that the price elasticity of demand from iPad consumers is relatively high; that is, charge $10 to an iPad consumer and you generate many more sales than $10 charged for other types of consumers. In this environment, it is not obvious that the iPad will lead to higher digital subscription prices.
In the future, Apple could, of course, have the requisite degree of market power. At that time, these issues may be very salient; although then Apple could easily adopt the defence that these were practices that it enacted prior to having that power. But antitrust law, as it currently stands, has difficulty in dealing with industries whereby the path is towards monopoly and how to act prospectively about it. There are cases where perhaps vigilance should be deployed and it is clear that Apple’s ascendency in these markets is one that at least causes authorities to ponder the question.