While Google's recent spats with the Federal Trade Commission (FTC) and the European Union have held a tight lead in news headlines lately, it appears to be Apple’s turn for the focus of questionable business practices.
As first reported by The Verge and confirmed by Bloomberg, the iPhone maker has not only made its way onto the FTC's radar, but also is possibly being watched by the Department of Justice (DOJ) as well. Apple has been accused of anti-competitive practices as it prepares for the relaunch of its acquired streaming service, Beats Music, which is expected to debut this summer at the 2015 Worldwide Developers Conference. (Apple purchased Beats Music and Beats Electronics for $3 billion last year.)
According to sources with The Verge, Apple has been attempting to secure backdoor, exclusive deals with major record companies, asking labels to forgo renewing Spotify’s license to stream music through its free tier.
Spotify has a strong listener base of 60 million members, but only 15 million users pay for its premium service. The music-streaming company heavily relies on ad revenue, but Apple is looking to break Spotify's "freemuim" model and transition to its own, which will reportedly feature a large amount of exclusive content.
Apple’s proposed business model is likely very enticing to the floundering music industry, and the current system of freemium services has not been popular among musicians. As Lucian Grainge, chief executive officer of Universal Music Group, told Re/code recently, “Ad-funded on-demand is not going to sustain the entire ecosystem of the creators as well as the investors."
Verge sources also reportedly indicated that Apple might have offered to pay YouTube’s music licensing fee to Universal Music Group if the label pulled their content from the video-sharing site, but rumors of this seem to have quieted since its initial reporting.
While Bloomberg confirmed the FTC probe, it refuted claims that Apple was pressuring the industry to cut out the competition, according to its own music-industry sources. But if you ask the music execs who spoke with The Verge, "All the way up to Tim Cook, these guys are cutthroat."
Since nearly everything Apple does is a closely guarded secret, it will be left to the FTC to determine if Apple is breaking the law. (Though, when FTC investigators concluded that Google was involved of anti-competitive practices a few years ago, the agency decided not to pursue legal action.)
The DOJ has reportedly spoken with top music executives about how Apple has gone about doing business, but is taking a more passive approach compared to the FTC, who in recent weeks has began pushing an investigation forward.
As reported by Bloomberg:
The FTC's investigators, still in the early stages, of their inquiry, are asking whether Apple’s efforts will change the way music labels work with other streaming services, for example curtailing ad-supported music and pushing more songs into paid tiers of service at higher rates, according to one of the people.
Another issue with Apple entering the music-streaming market is the so-called “Apple tax.” As The Verge reports, Apple charges a 30 percent commission on all sales through its App Store, which includes subscription services. So for Spotify to sell its app through Apple – which typically goes for $9.99 – with the mark up, Spotify would need to sell a subscription at $12.99 to make the same profit. This could prove a major issue since Apple could sell a Beats subscription at the lower price.
Additionally, Apple doesn't allow apps that redirect to other sites. So, while a Spotify subscription would still cost about $10 on its website, the company would be forced to share profits with Apple.
In an age of rampant digital piracy, Apple has mostly managed to maintain a thriving business in music with iTunes. But a recent dip in digital sales, thanks to rivals such as Spotify and Pandora, likely gave the tech giant a stiff shot of reality as more consumers move to the very crowded streaming market.
So what does the richest company in the world do when it enters a sector with little wiggle room? Well, according to Fortune’s Philip Elmer-DeWitt, there is a very precise formula Eddy Cue, Apple’s chief content negotiator, has followed through the “tens of thousands” of media contracts he has dealt with. As he stated during a different DOJ probe into Apple’s anti-competitive practices, for the trusted formula to work, he:
- Studies the new market
- Identifies the biggest players
- Figures out how Apple can enter the business profitably
- Sets a deadline, and
- Approaches the key players, one at a time, with identical offers.
Mr. Elmer-DeWitt closely followed the 2012 e-book antitrust trial against Apple. The case alleged that as the launch of the iPad approached, Mr. Cue leaked information to book publishers of which competitors had signed on with Apple. The anti-trust allegations came from the DOJ, who said that the company’s approach to the market had forced its main competitor – Amazon – to adjust its own business model and raise prices of its top-selling e-books.
While Cue said during the case that it was the publishers, not Apple, who were responsible for the price raises, the judge disagreed, giving Apple the title of “ringleader” in the “illegal conspiracy,” and ordered it to pay $450 million in damages. Apple is currently appealing the decision.
If you ask Elmer-DeWitt, this is likely the same formula Apple is following in its approach to entering the music-streaming sphere, which, if it turns out anything like the e-book case, will be problematic to the Beats relaunch.