Friday, July 1, 2016

Spotify's concerns over Apple Music are obvious but it's just manufacturing an App Store antitrust issue

[UPDATE on July 2] Apple's response has now been leaked. Apple's general counsel says that Spotify's "in-app purchase feature had been removed and replaced with an account sign-up feature clearly intended to circumvent Apple's in-app purchase rules." Thereafter, on June 10, Spotify submitted another version, which in Apple's opinion was part of a "continued attempt to get around [Apple's] guidelines" and "to circumvent in-app purchase rules." [/UPDATE]

I wish to clarify upfront that I've never done any work for Apple or Spotify. A more elaborate disclosure can be found at the end of this post. The perspective from which I am writing this post is that of an app developer who happens to have fought hard for fair, reasonable and non-discriminatory (FRAND) behavior by companies wielding monopoly power. And one of the two iOS apps I'll launch later this year will come with two different types of subscription offerings, which users can even use in combination. So I do have a strong interest in this, but for now I can't see any wrongdoing on Apple's part.

Spotify's general counsel Horacio Gutierrez--who used to be Microsoft's second-highest-ranking in-house lawyer--has reportedly sent a letter to his counterpart at Apple alleging violation of U.S. and EU antitrust laws as Apple has so far rejected an update to Spotify's iOS app. More generally, Spotify complains about a "troubling pattern of behavior by Apple to exclude and diminish the competitiveness of Spotify on iOS and as a rival to Apple Music," referring to "previous anticompetitive conduct aimed at Spotify."

Spotify still has about twice as many subscribers as Apple Music, but the latter still casts a dark shadow over the impending IPO of the former.

Few people could claim to know the U.S. and EU antitrust game better than Mr. Gutierrez, who among other things also was in charge of Microsoft's EU activities. At this stage, Spotify's obvious objective is to instigate formal antitrust investigations of Apple's conduct in the U.S., the EU (Spotify is a Swedish company), and potentially in Asia, where the scope of an ongoing investigation (in South Korea) is unclear. Getting antitrust authorities to investigate a company like Apple requires a mix of demonstrating a genuine competition issue, broadbased support for a formal or informal complaint, and some publicity. Leaking letters is common in this situation.

Apple avoided antitrust scrutiny a few years ago, and I'm convinced that its recent modification of subscription terms--reducing its App Store cut from 30% to 15% after the first year of a subscription--was not a voluntary act of generosity but motivated exclusively by Apple's desire to avert formal investigations. The reduction was announced shortly before last month's developer conference (WWDC) and first reported by Jim "The Beard" Dalrymple on (The Loop) and by Lauren Goode on TheVerge.

It's worth noting that Google, which could face similar complaints at some point, matched Apple's move and even went beyond: Google reduces its share of subscription revenue to 15% from the first day, not just starting with the second year. The Loop's Dave Mark wrote he was "[s]till trying to wrap [his] head around the logic of waiting 12 months before the 85/15 split locks in." Rightfully so, but it does make sense against the background of Spotify's antitrust initiative: since Spotify has been around for years, it can no longer complain about the 30% cut--by which it's no longer affected--being too high, but Apple has kept a nice bargaining chip. If that's what it takes to provide a face-saving exit to antitrust authorities, now or later, Apple can hand them a victory by letting the 85-15 split apply to new apps.

So the key question to think about in light of Spotify's letter is this: does Apple have to do more to avoid formal antitrust scrutiny? That question must be looked at from multiple angles:

  1. Are antitrust enforcers likely inclined for political reasons to do Spotify the favor it's asking for?

    I think Apple faces a pretty significant political risk, for various reasons including (but not limited to) its enormous success, its controversial tax minimization strategies, its lack of cooperation in the San Bernardino context, and the fact that Spotify as well as some of the leading game app makers (Supercell, are based in Europe (though King now belongs to Activision Blizzard and roughly 85% of Supercell's shares are being acquired by China's Tencent).

  2. Does Spotify have a genuine, meritorious antitrust case at this juncture?

    I don't think so. If one focused strictly on the facts, leaving aside political considerations and everything else, then antitrust authorities should either require Apple to expand the 85-15 split or move on.

    If Apple had not made the 15% change and were then undercutting Spotify simply by leveraging the 30% cut, that would be an issue, but the 30% no longer applies to Spotify's long-term users, so Spotify's average percentage will be far below 30%. If Apple were abusing the app review process by raising unfounded objections (of a technical, editorial or commercial nature) for the sake of having a pretext to withhold approval, I'd be on Spotify's side without hesitation. But I don't see that being the case here. Much to the contrary, I think Spotify's current behavior is abusive and the opposite of consumer-friendly.

    Essentially, Spotify wants to charge people more if they subscribe via the App Store than if they do so via Spotify's website. Apple doesn't appear to prohibit external subscriptions, and it doesn't even appear to dictate the prices of external subscriptions. But it's against Spotify charging iOS users more than Web users and promoting that fact aggressively. I understand Apple's position.

    Consumers can benefit indirectly from competition between music delivery services, but Spotify's fight for its right to set higher prices on the App Store is self-interested and, at least in the short term, bad for consumers.

  3. If someone wanted to set up a third-party App Store competitor and if Apple then prevented that third party from doing so, there could be some interesting issues, but there is no indication of Spotify or anyone else trying to do that at this stage.

Having outlined my overall position on this, I'd now like to talk about my own perspective and interests.

Just like any other app developer, I'd obviously like Apple to lower its App Store fee from 30% to 15%, for all transactions, all apps, and from Day One. However, I'm probably much more relaxed about the 70-30 split than most other people because I've been in the consumer software industry for a long time and I still remember the cost of getting your software distributed to end users 10, 20 or 30 years ago. Compared to today's environment, it was a nightmare:

  • We had to grant a discount on the order of 30% (maybe 20% or 25%, but no less than that) to any reseller who simply presented a certificate of registration of his business.

  • Large retail chains received discounts between 40% and 50%. Every year they came back to us and told us they needed more. And several times a year they demanded cooperative advertising allowances, which were (not in whole, but in no small part) a rip-off we hated.

  • Distributors/wholesalers/importers got discounts of about 60%. So instead of Apple's 70-30 or 85-15 split, it was practically a 40-60 split--almost the reverse ratio--unless you decided to hire your own sales force.

  • Even the guys with the 60% discount didn't really give us access to a global market. Many of them served only customers in one country, or maybe in a small set of countries such as the German-speaking countries. So you also had to maintain customer relationships with a large number of distributors if you wanted to sell a product around the globe. With Apple or Google, it's a one-stop solution now.

There are obvious reasons for which digital software distribution must be more favorable to software publishers than physical distribution. No warehouses, no trucks, no risk of goods being damaged. Still, access to consumers is access to consumers. Apple provides it, and I can live with those terms, though 85-15 is not only more desirable but also more reasonable from my point of view. Spotify's problem is all about the fact that Apple is competing with it, and that competition from the likes of Apple, Google and Amazon is going to be the primary concern on investors' part when Spotify goes public. As Jordan Crook noted on Techcrunch, "Spotify can only afford to hold siege against Apple for so long."

I'll probably comment on this again, maybe even repeatedly. Having been at the center of baseless conspiracy theories more than once, I'll now make some rather elaborate and forthright disclosures.


I've never done any work for Apple or Spotify. I'm long AAPL. I know the author of Spotify's letter, Horacio Gutierrez, back from his years at Microsoft, but haven't talked to him in a couple of years. What I can say is that Spotify got one of the very, very best corporate lawyers in IT, and probably the best fit one could have imagined for Spotify given Horacio's knowledge of IP licensing, litigation, policy, and antitrust. He and Apple's general counsel will be well-matched combatants. I disagreed with Horacio on the desirability of software patents, I agreed with him on FRAND, and for now I'm unconvinced of his allegations against Apple. I'm not saying they're totally baseless, but I don't think there is a strong case now for formal antitrust investigations. I obviously reverse the right to adjust my opinion if new facts are put on the table at some point.

As loyal readers of this blog know, I have supported Apple on FRAND licensing of standard-essential patents, I have supported it in other contexts, but I oppose attempts to extract unreasonable leverage from "dead patents walking" and share numerous organizations' and individuals' concerns over an unapportioned disgorgement of infringer's profits when design patents cover only minor visual aspects of highly multifaceted and multifunctional products.

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