The technology industry has long been concerned by regulation. The potential for impacts on profits are huge as the general overhead to doing business tends to increase exponentially when regulators become involved. Technology has thus far had a relatively free reign when it came to regulatory oversight (at least compared to other traditionally regulated industries such as finance and medicine for example), but as time passes and the major industry players become more entrenched, the likelihood of regulators imposing rules increases. Today, we take a look at the news that the EU will launch a formal investigation into Spotify’s complaint against Apple (NASDAQ:AAPL), but first a brief primer.
Regulation is in many respects a double edged sword. Meant to keep the private sector in check where the desire for supernormal profits are of course the goal, the objective of the free market is of course to promote competition with the ability to profit and if supernormal profits are being obtained then under a perfect competition model, new entrants should identify the industry, enter it and compete until the ability of any company in the industry to obtain supernormal profits is eradicated. This obviously assumes that the goods and services offered by competing companies are effectively commoditised and broadly homogeneous, however (as we all know) companies have lots of tricks to differentiate themselves and their offerings from those of competitors including branding/marketing as well as product quality etc.
As such, when a company becomes so big that it has the opportunity to earn supernormal profits to the detriment of the consumer, regulators tend to become involved at some point because after a sustained amount of time with that being the market condition, the ability of new entrants to compete away those profits becomes limited due to the ability of the company to implement barriers to entry against new competitors. The conundrum however is that a regulator in many ways also acts as a barrier to entry since (as mentioned above), the costs of implementing regulatory compliance can be so high (hence the double edged sword). This therefore can lead to effectively monopolistic (or close to it) type companies which are regulated to ensure both quality of service as well as ensure that consumers are not being taken advantage of.
It isn’t particularly often then, that governments stride in to enforce regulation of new industries and the capitalist model has provided for numerous industries where the barriers to entry are not so high that new entrants can’t compete away corporate behaviour which is detrimental to the consumer.
Apple – The New Services Giant – Taking on Spotify and Netflix
As we’ve covered many times in the past, Apple has been slowly drifting away from the iPhone as its chief revenue driver. As much as people hate on Apple, we all love a stellar product and it should be clear to anyone with common sense that Apple effectively created the smartphone market as it exists today. It’s possible we may have had the smartphone and digital world we have today had Apple not created the first iPhone but chances are it would have come along later and may have looked different.
Since that fateful day in 2007 when Steve Jobs and his engineers launched a product that would eventually change the way much of the world works, Apple has had it good and has profited immensely but market saturation and high prices have finally struck home, combined with competition which has seen Apple drop from first place to second in the smartphone market stakes and now down to third place (Huawei overtook it in Q1).
The former House of Jobs, now bereft of its visionary product CEO (read my piece on that topic here) has changed focus from hardware to services. Let’s be clear, in the fact of no new ground-breaking products (which, let’s face it, haven’t really materialised since the iPhone), the pivot was probably required to get the company on to a trajectory which could keep investors happy. Continuous revenue streams and subscription services are things that shareholders love. It’s why much of the gaming industry has gone to the “live-service” model with rumours that EA (NASDAQ:EA) will even put more live-service elements in the next Dragon Age game.
The problem with a services business is that if Apple chooses to more heavily seek to monetise its current services offering, that will likely be to the detriment of companies it these days deems to be competitors such as Spotify. The complaint centres on the headline 30% fee that Apple (and Google NASDAQ:GOOGL does the same FYI) charges developers like Spotify that sell via the App Store. The reason the complaint specifically singles out Apple however rather than both Apple and Google is that Apple makes life harder for companies to try to get around its 30% fee. Spotify alleges that updates to its app are blocked by the Apple App Store when those updates include attempting to notify its users that it can get its subscription cheaper at the Spotify website than on their iPhone.
The trouble here is that Spotify argues it can’t compete with the home-grown Apple Music offering effectively and as such is making a case that Apple has raised barriers to entry (although in fact Spotify is the incumbent here) for competitors. The same could also be said of Apple’s TV Plus premium offering and the hard time it has been giving Netflix (NASDAQ:NFLX) recently. Netflix laughed off the Apple invasion on its turf, calling the company “very late” to the streaming TV game but it should beware. It only took Apple Music 3 years to overtake Spotify and now that the behemoth has turned its eye to services, it could only be a matter of time.
TV has a slightly different setup to Music it’s true, Netflix is now the creator of significant original content and desirable exclusives rule the roost in the TV game whereas with music, people want all the big hits no matter the label that publishes them so it’s not entirely an apples to apples (chortle) comparison but betting against Apple will take some guts.
The EU – No Friend of Big Tech
So to the EU, which has long passed rulings against big tech which it feels are to the detriment of its consumers. Over half a billion consumers live within its borders (less if/when Brexit actually kicks in, although the likelihood that the UK will become an EU rule-taker to a certain extent seems to remain) and it has now confirmed that it will launch a formal investigation into Spotify’s complaint against Apple after studying the initial complaint and sounding out competitors, customers and others.
As a quick reminder, this isn’t the first time the EU and Apple have locked horns. In 2016, the EU fined apple €13 billion as it deemed Ireland had given tax breaks to the company which constituted illegal state aid. That case began in 2014 and is still working its way through appeal so anyone expecting a quick resolution to this latest complaint is in for a shock. The investigation will likely take years although this is as it should be for the fine if Apple is found guilty could be up to 10% of global sales.
As ever, we’ll be watching and report on the latest. In the meantime, if you’re an Apple user and want Spotify, I’d suggest taking a look at the Spotify website for the best deals on your service…