Spotify just painted a big target on Apple's back, and the iPhone maker should worry if antitrust regulators start aiming at it

apple ceo tim cookTim Cook, chief executive officer of Apple, attends the annual Allen & Company Sun Valley Conference, July 12, 2018 in Sun Valley, Idaho.Drew Angerer/Getty Images

  • The complaint Spotify filed against Apple with European competition regulators on Wednesday represents a real danger to the iPhone maker.
  • Spotify's complaint looks legitimate and is similar to those successfully made against Microsoft and Google.
  • European regulators have been much tougher in recent years in cracking down on tech companies anti-competitive moves than American antitrust regulators.
  • Should they find Apple guilty of abusing its market power, the company could face big fines and restrictions that could thwart its burgeoning services business.
  • The complaint comes amid growing complaints in the US about the market power of big-tech companies and could spur a parallel investigation here.
  • Apple could see its reputation tarnished by such investigations, which could be the biggest danger of all.

Spotify's decision to file a complaint against Apple with the European Commission alleging unfair competition should worry the folks in Cupertino.

At first glance, the streaming music company would seem to have a legitimate complaint. In fact, what Apple is alleged to be doing isn't all that different from what got Microsoft in trouble with antitrust authorities 20 years ago and what led to a $5 billion fine against Google just last year.

If history is any guide, Spotify's complaint could lead to a similarly large fine against the iPhone maker. It might also lead to restrictions that could hamper Apple's services business, which the electronics giant has been touting as its future. And the complaint could spur a parallel antitrust investigation here in the US.

But perhaps more importantly, Spotify's allegations - any investigation that truly digs into them - could sully Apple's reputation with consumers. That could be extraordinarily costly for a company that has long benefited from public adulation and the hundreds of millions of dollars worth of free publicity that's come hand-in-hand with it.

Read this: Spotify is going to war with Apple, filing an antitrust complaint over fears that it is crushing competitors

Those targeting the big tech firms haven't been aiming at Apple

Until now, Apple has been fairly lucky. Although there have been growing calls to address the market dominance of the big-tech companies, advocates have generally focused on Facebook, Google, and Amazon.

Apple has often been left out of the list of potential targets.

It's not hard to understand why. Apple has a huge number of fans, and 20 years after it nearly went bankrupt, it's still viewed by many as an underdog. And while the iPhone maker is currently the second most valuable public company in the world, it doesn't appear to dominate markets in the same way that the other big-tech firms do.

Facebook is the dominant social network. Google owns the search market and the vast majority of smartphones worldwide run its Android operating system. Between the two of them, the companies are expected to account for more than half of the global digital ad market this year.

Meanwhile, about half of all US e-commerce purchases are made through Amazon. And Microsoft still dominates the PC operating system market.

By contrast, Apple wouldn't seem to control any notable industries. Its Mac computers have long had only a small portion of the overall PC market. The iPhone may be one of most popular lines of smartphones in the world, but Samsung sells more phones overall and Huawei has nearly overtaken Apple in market share. Apple Music may have raised Spotify's ire, but it's still a distant second to Spotify in terms of subscribers.

But such high-level views understate Apple's actual market power.

Apple has monopoly control over the iPhone app marketplace

Depending on which research firm you believe, around 35% to 40% of the smartphones sold in recent months in the US were iPhones. And, again, depending on which firm you believe, around 45% to 55% of the smartphones currently in use in the US were made by Apple. In either case, the number of Americans with iPhones is a huge number.

Regardless of its overall market share in smartphones, Apple's operating system runs on 100% of the iPhones in use in the US and worldwide. You basically can't run an operating system other than Apple's iOS on an iPhone and you can't run iOS on any devices but iPhones.

What's more, Apple controls the distribution of apps to iPhone users. While there are a few exceptions, iPhone users generally have to get their apps from Apple's App Store.

Apple's control over the operating system and app store on iPhones is akin to a railroad that serves as the only rail link for a section of the country, said Matt Stoller, a fellow with the Open Markets Institute, a research and advocacy group that focuses on the dangers of corporate concentration. That railroad may not dominate the entire nationwide market, but for the area in which it operates, it's a monopoly.

Spotify and other app makers "can't get to their customers who use iPhones except through Apple's App Store," Stoller said, adding that the App Store "is a monopoly, at least to an important set of Spotify customers."

Apple seems to be abusing its power

Apple, arguably, has been abusing that monopoly. Unlike Spotify's music app, or Google's Chrome browser, Apple's rival apps - Apple Music and Safari - are built into iOS and come pre-installed on the iPhone. On the iPhone, users can't chose alternate apps to be their defaults; generally if they click on a web link, it will open in Safari, even if they have Chrome installed. According to Spotify, Apple's Siri still won't play songs in its music app, but has no problems playing songs in Apple Music.

Spotify Daniel EkGetty

And Spotify says Apple has been doing much worse than that. Apple requires that apps listed in its App Store that offer subscriptions use its payment service, for which Apple charges a 30% commission.

The company forbids developers from pointing users to their web sites to sign up for subscriptions there instead.

So, developers face a choice - they can pay Apple's tax to make it easy for users to sign up for subscriptions, or they can save money and offer a worse experience.

The fee Apple charges can make competing services uncompetitive. To recoup its costs for paying Apple's commission, Spotify used to charge its iPhone users $12.99 a month - $3 more than it charged those who signed up through its website. By contrast, Apple Music didn't have to pay those charges and iPhone users were able to sign up for subscriptions inside its app for just $9.99, Spotify says.

What's more, Spotify says Apple has barred it from advertising or offering promotional rates for its service inside its app. It's also repeatedly delayed approving Spotify's app updates, the streaming music service said.

And for years, according to Spotify, Apple blocked it from offering an Apple Watch app and still bars it from offering an app for Apple's HomePod smart speaker.

Apple's actions appear similar to Microsoft's and Google's

Those kinds of alleged actions are reminiscent of the anti-competitive - and illegal - moves that Microsoft and Google were found to have perpetrated. In both cases, the companies were found to have used their dominance over an operating system to give an unfair advantage to their own apps or services.

In Microsoft's case, it famously used Windows to promote Internet Explorer and thwart Netscape's rival Navigator browser. In Google, it used its control of Android and the Google Play store to force smartphone makers to make its search engine and its Chrome browser default apps on their devices.

In a similar way, Apple has "dominant power over what is a vital artery of commerce," Stoller said.

Spotify's complaint is only the beginning of what could end up being a years-long investigation by the EC's competition regulators. But even the possibility of such an investigation should be worrisome to Apple CEO Tim Cook and his crew.

While US antitrust regulators have been lax about their duties in recent years, the EC has been much more aggressive.

The competition authority has twice fined Google for illegally abusing its market power, most recently this past summer levying a $5 billion fine as part of the investigation into Google forcing smartphone makers to install its Android apps. It also fined Microsoft more than a billion dollars in total for abusing its Windows monopoly.

With more than $200 billion in the bank, Apple could easily afford such a fine. What might be more painful for it, though, are restrictions the EC could place on its business. As part of its decision against Google, the EC ordered it to stop forcing smartphone makers to install its apps as a condition of using Android and gaining access to the Google Play Store. Regulators could similarly order Apple to stop giving preferential treatment to its own apps.

Warren's call could prove costly to Apple

And if Sen. Elizabeth Warren of Massachusetts has her way and gets US regulators involved, they could do much more than that. Warren has called for an end to the practice of companies both owning a platform and participating in that platform. She's specifically named Apple as a company that's in violation of that principle.

Elizabeth WarrenScott Olson/Getty

In Apple's case, such a rule would mean is that it wouldn't be allowed to both operate an app store and offer apps that compete against apps listed within it. So, the company could choose to operate the App Store or offer Apple Music, but not both.

While Warren's no shoo-in to become president, she's only part of a growing chorus on this side of the Atlantic calling on regulators here to break up the tech giants. Even if she doesn't reach the White House, her ideas on what to do about them could well influence whomever is elected next year.

The kinds of prohibitions Warren is calling for could stymie Apple's burgeoning services business. Much of the revenue garnered by that segment comes from Apple's commissions off App Store sales and from subscription revenue from Apple Music. Later this month, it's expected to launch a subscription streaming video service that will compete with Netflix and bring in additional services dollars.

As Apple's iPhone sales have started to decline, it's been banking on its services business to drive future growth. But regulators could undermine that effort.

Apple could suffer more than most from bad PR

But the bigger danger to Apple from the Spotify complaint could be the public-relations hit it could cause. In the mid-1990s, before the antitrust trial, Microsoft was one of the most respected companies in the US and Bill Gates was one of the most widely admired business leaders.

But that case, which brought to light Microsoft's cutthroat tactics and Gates' seemingly disdainful attitude toward government oversight, damaged the reputations of both.

bill gates climate change commissionAmerican businessman and philanthropist Bill Gates makes a speech at the Malaria Summit at 8 Northumberland Avenue on April 18, 2018 in London, England. The Malaria Summit is being held today to urge Commonwealth leaders to commit to halve cases of malaria across the Commonwealth within the next five years with a target to 650,000 lives.Jack Taylor/Getty Images

That negative PR arguably encouraged both consumers and corporate customers to seek alternatives to Microsoft and opened up space in the market for products from Google, Mozilla, and, yes, Apple.

Today, Apple ranks among the most admired companies in the world.

And the largely positive feelings and excitement it engenders among its many fans has brought the company millions, perhaps billions, of dollars worth of free and largely positive publicity over the years.

Thanks to that, the iPhone maker's marketing budget has been a fraction of the size of other consumer companies.

An antitrust complaint could transform the public perception of Apple from being the cool, consumer-friendly alternative company to just another ruthless bottom-line focused corporation.

You can bet that Apple really doesn't want to face that music.

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