At the heart of the probe is this: Music-streaming companies, such as Rdio, Spotify and Rhapsody, rely on Apple to sell their products to consumers. And Apple takes a cut of that money, even while it is installing its own rival service on every iPhone and iPad.
This is what has drawn the FTC’s attention. And it has broader implications for the tech industry. Apple, along with Google and Facebook, are so big and powerful that they have become more than neutral platforms. They are both distributing products for other companies and offering direct competition to that content.
What is so tough for regulators here — other than that they are using relatively arcane laws that probably never anticipated the innovation now going on in the tech sector — is that the streaming companies really do have a lot of ways to reach consumers. They can sell it over the Internet. And they all offer apps on Google’s store, which actually serves more customers around the world than Apple does.
So is Apple’s behavior truly anti-competitive?
“The fundamental question is if it is big enough to wield enough market power that can harm the competitive process,” said Gene Kimmelman, president of media public interest group Public Knowledge. “Music distributors would need to show that they truly need to be in the iTunes ecosystem to demonstrate a legitimate competitive concern.”
The streaming companies say that iPhone users are too important to their business and there is virtually no way to reach those tens of millions of consumers without relying on Apple.
And you don’t have to be the biggest firm to harm competition, antitrust experts say.
Ultimately, the FTC’s case — if it ever gets that far — might depend on its ability to show that Apple violated Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices.” That law allows the FTC to broadly interpret abuses of power, even by companies that aren’t clear monopolies, such as Apple. A person close to the probe said federal officials have asked questions to determine whether there are economic and competitive harms to rival streaming services.
“It would be a rare move by the FTC and would have huge implications because it would capture a lot of tech companies,” said Robert Lande, a professor at the University of Baltimore School of Law. “It means that if you aren’t a dominant firm with 60 percent of the market but are still a very important firm with 40 percent of the market, the government will scrutinize your conduct.”
Here’s how the relationship between Apple and music streamers work:
- All music streamers can be downloaded from the App Store for free. But if consumers decide to subscribe to a paid service through the app, 30 percent of those proceeds go to Apple.
- The terms of the agreement with Apple prevent Rhapsody, Rdio and Spotify from marketing cheaper, Web-based versions of their services in the app itself, a practice that Google’s Android store allows.
- Apple doesn't allow streaming apps to offer discounted plans such as a "family user" plan for several users to share, even though it offers that for its own Apple Music.
These practices, streaming companies contend, force them to charge a couple dollars more than Apple does for its music service. Rdio chief executive Anthony Bay called the 30 percent cut an “Apple Tax.”
“It’s pretty challenging for us and ultimately bad for the consumer,” Bay said in an interview, while declining to comment on whether Rdio has been involved in the FTC probe. “And I can tell you the number one complaint we get from people is finding out they had to pay more through Apple than they could of through us directly. But we just aren’t allowed to tell them. Obviously, Apple doesn’t charge itself 30 percent.”
Voicing similar frustrations, Spotify recently e-mailed subscribers to explain how they could drop their monthly subscriptions sold through Apple for a cheaper plan directly offered through Spotify’s own Web site. The company said 40 percent of those subscribers opened their e-mails, but the process of switching out of the subscription they already have through the app on their iPhones and iPads is cumbersome.
Apple declined to comment about the FTC probe. The FTC declined to confirm that it has launched a formal investigation.
Here’s what we were told about the FTC’s review by three people with direct knowledge of it, who spoke on the condition of anonymity because it is private:
- It grew out of questions by the Justice Department and FTC over Apple’s relationship with music labels, specifically Universal. That review was over allegations that Apple and music labels colluded to get rid of free streaming services. Those reviews appear to have largely been closed.
- In those conversations, which began at the start of the year, federal regulators also asked questions about Apple’s power over smartphone users and allegations of antitrust violations.
- For several weeks, the FTC has asked questions and held meetings with rival streaming companies. It has also asked questions of state attorneys generals in Connecticut, New York and Texas, who are also investigating Apple’s App Store practices. One person familiar with the FTC investigation described it as “intensifying” in recent weeks, with the FTC interviewing companies with greater frequency.
- It doesn’t appear that the FTC has sent formal letters or subpoenas to Apple or streaming companies. It could take many months before the FTC determines if it has enough to file charges against Apple.