Tuesday, April 13, 2010

Apple and App Neutrality under EU Law

And now for a little extracurricular detour from (the usual) net neutrality, with a venture into app neutrality. I was struck by the recent reports of Apple's revising of the License Agreement for software developers on the iPhone, iPad, or iPod Touch platform. The most striking modification reads:
3.3.1 — Applications may only use Documented APIs in the manner prescribed by Apple and must not use or call any private APIs. Applications must be originally written in Objective-C, C, C++, or JavaScript as executed by the iPhone OS WebKit engine, and only code written in C, C++, and Objective-C may compile and directly link against the Documented APIs (e.g., Applications that link to Documented APIs through an intermediary translation or compatibility layer or tool are prohibited). [Italics added]
This amounts to a explicit boycott of—most visibly—Actionscript, the programming language for Adobe Flash. Apple's distaste for Flash has long been latent, and it's by no means a coincidence that Flash support has always been absent for iPhone or iPod Touch. Apple's change of the License Agreement comes at a time when Adobe is about to launch the latest iteration of its flagship software package CS, including the option to develop iPhone/iPad/iPod Touch apps using flash—again, what a coincidence.

Now, at a time when most online video runs on Flash, it is rather annoying not to have access to the Daily Show episodes on my iPhone. Besides my personal annoyance, Apple's boycott also chains software developers, and seems to have a negative effect on Flash's market position. Which begs the question: can we (myself, app developers, Adobe) turn to (European) law to do something about this? Short answer (SPOILER ALERT): unlikely so.

There are a number of possible approaches to this issue under EU law. As both Apple and Adobe are established in Europe, EU law can be invoked. The obvious approach would be European antitrust law, mainly art. 102 of the EU Treaty. It seems as if art. 102(c) is applicable in this case for instance, as Apple indeed seems to be "applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage." For art. 102 to apply, Apple and Adobe need not be direct competitors—which they are not at this point. Rather, abuse of dominance over potential competitors also suffices. However, under an art. 102 procedure a situation of dominance needs to be established first, which is calculated by a process of market definition. I don't want to bore anyone with the details on EU market definition (here), but bear in mind that product markets, geographic markets and temporal quality are factored in. A plausible relevant market in this case for instance would be the European market for mobile operating systems.

Case law has not established a golden rule of what constitutes dominance on a market once defined, but generally speaking anything over 40% is in trouble. Now, clearly Apple does not hold a market share of over 40%, either as a mobile OS or as a phone manufacturer. Therefore it would become hard to argue an art. 102 violation by Apple, as dominance cannot be established. Moreover, let's not forget that this case appears to concern a two-sided market: Apple functions as a platform serving both app developers and end-users. This complicates the process of market definition even further.

Let's for the sake of argument assume that Apple were dominant on the Mobile OS market. This would open up the realms of Refusal to Supply case law—as Apple would refuse to Adobe supplying flash products to end-users on its products. The ECJ has been rather strict in refusal to supply cases, and has struck down hard on firms dominant firms refusing to supply, like Commercial Solvents and United Brands. It's only in very few cases that plaintiffs in refusal cases have successfully argued for objective justifications of their conduct—Apple's rebuttal that refusing Flash will "result in sub-standard apps" and "hinder the progress of [Apple's] Mobile platform" are unlikely to hold up.

So refusal to supply would stand a chance, if Apple were in fact be dominant on the defined market for this hypothetical case—which it is likely not. So much for EU antitrust.

Next: what about European harmonizing regulation, like the telecoms Framework and the eCommerce Directive? About the telecoms framework I can be short: it does not cover content, only telecommunications on the network level. For the eCommerce directive it is the other way round: it does exclusively cover "information society services" (content), yet doesn't affect apps much—or Apple for that matter. Moreover, it is highly unlikely that a patchy Directive like eCommerce can be directly invoked by (legal) persons in a private law suit. Forgive me for not going into the details of direct effect of Directives, it's a long story.

Now please tell me if I've overlooked something, but it seems as if Apple will get a pass for its conduct under EU law. There is the fundamental rights route, with the EU Charter of Fundamental Rights codifying the freedom "to receive and impart information and ideas without interference by public authority and regardless of frontiers" (art 11). This would be a long shot though: not only would it be a hard case to make for a claimant that Apple is completely preventing app developers (or Adobe) to receive and impart information, such claims have also only rarely been upheld in private suits.

So EU law seems to be exhausted, but is this really a problem? When following a Chicago School rationale, it seems we shouldn't be too bothered with Apple's conduct. If it hampers innovation and is inefficient, even as a monopolist it will attract entry by competitors who do allow all API's on mobile app platforms. The problem with this Chicago approach is that it doesn't take network effects into account. There has in fact been a lot of entry in the mobile app field, think of Android Market. But app developers want to be where all other apps are: the amount of participants on a network increases its value for all. The Apple app store features thousands of apps, which makes it most attractive for developers to write apps for the Apple platform. Compare that with the about 800 apps currently available on Window's app Marketplace.

Apple is well aware of this situation, and naturally wants to keep it that way. So even though Apple and Adobe are not directly competing, Apple has much incentive to foreclose Adobe on its platform. As Joe Wilcox correctly remarks, flash offers developers a way around the app store—a flash platform through a browser. Apple doesn't want this of course, as the app store (1) increases the value of the iPhone/iPad/iPod Touch for consumers, and (2) generates a lot of revenue for Apple.

Concluding: it is perfectly clear why Apple is foreclosing on Adobe, Apple's conduct is likely to have an anti-competitive effect, yet European law stands idle. This re-enforces Jonathan Zittrain's call for API neutrality. The walled garden that Apple is building works very well as a stand-alone platform, in which hardware and a rich suite of software are perfectly integrated. This is satisfying to consumers (like myself), and profitable for Apple. However, in the long run walled gardens hinder innovation in a way almost similar to state planning: it adds a layer of control and bureaucracy to what otherwise would be free floating innovation by software developers.

DISCLAIMER: this is a purely (legal) theoretical point, and very much work in progress. I'm still looking into economic studies and empirical work. Please comment!

1 comment:

chris said...

Given the relatively minor role the iPhone plays in the overall smartphone market, why not try to redefine based around the application developer market for smartphones? There is the fixed-mobile termination argument there - i.e. that Apple Store is a self-defined monopoly for that portion of the population of smartphone users that needs apps for the Jesus-phone.