Writers at Faultline has worked on both the IBM anti-trust case in Europe in the early 1980s and the Microsoft case that has only really just been resolved. Between times we have seen attempts by the European Commission to investigate Intel’s chips sales and the distribution tactics of Hollywood. And one thing that Apple needs to know is that the European Commission is a law until itself.
Microsoft executives, and before it those from IBM, were constantly surprised at how the wheels of law work in Europe. There is no court case, there is a collection and perusal of evidence by a court and then a decision is made whether or not there is abuse of a dominant position and how to put it right. That court has the right to fine up to 10% of a company’s annual turnover for the period that the problem persisted, but has never yet gone that far. However, each successive case breaks new ground and Microsoft lost several € billions, in fines, failures to remedy and legal costs, over a period of almost a decade. Apple stands to lose a lot more.
At stake are Apple’s sales tactics and handset operating restrictions in Europe, and this week the news broke that regulators sent a nine-page questionnaire to several mobile network operators asking about their experiences with Apple.
While it is not a crime for a company starting in smartphones which is not dominant in a neighboring industry, to establish terms with harsh penalties for device shipment failures, it becomes illegal as a company such as Apple establishes dominance.
Apple needs to talk to the European Commission and agree generous changes to its terms of distribution across the EU. At present operators are under such pressure to ship iPhones that they are offered to customers ahead of every other phone, as anyone who has renegotiated a phone contract in Europe can testify. You get a phone call offering you an iPhone and no other phones, the website has the iPhone offers on the home page, and incentives are added for taking an iPhone over other phones.
It has all been reported by the Financial Times of London, which said it has seen the documents sent by the European Commission asking for data on these contracts. The EC, the European Union’s executive arm, wants to know whether Apple sets sales quotas for operator partners by requiring them to buy a minimum number of iPhones. If these quotas restrict the use of marketing budgets for other devices and demand carriers offer Apple the same or better subsidies and sales terms than other smartphones then the EC will simply find Apple guilty, offering it one chance to ‘remedy’ the situation unilaterally.
Here Apple is in immediate trouble. If it withdraws those terms from operators, its sales would fall, perhaps halve. If it refuses to, the EC will impose its own remedies, which would include a fine, potentially in the multiple $billions and the contractual remedies would be far worse than an agreed reduction in the terms. Once Europe gets this fixed, others areas of the world would follow. The stakes are relatively high, even for Apple.
The probe also seeks information related to allegations that Apple places technical or contractual restrictions on the iPhone 5 to prevent it from being used on certain LTE networks in Europe. There are indications that certain technical functions are disabled on certain Apple products in certain countries in the EU/EEA. If the existence of such behavior were to be confirmed, it would almost certainly constitute an infringement of antitrust law. This is reminiscent of how Microsoft disabled client servers applications with non-Microsoft servers and is fronwed upon.
The EC gave carriers until June 17 to respond to the questionnaire. Rumors have circulated in recent months regarding Apple’s alleged insistence that an operator’s LTE network must pass Apple’s own independent performance testing before it will enable LTE functionality for iPhone 5 handsets on that network. A handful of carriers have accused Apple of creating carrier haves and have-nots via such restrictions.
On that list are Tajikistan’s leading operator, Babilon-Mobile, and Switzerland’s Swisscom, which both have alleged in past months that Apple would not support LTE in iPhone 5 devices used on their networks. Norway’s Telenor also joined the list, with CEO Berit Svendsen telling Telecoms.com in March that Apple’s iPhone 5 will not operate on the operator’s 1800 MHz LTE network in the northern district of Tromso, even though the device supports LTE on the same band in the United Kingdom and Germany.
While those instances concern LTE functions being locked on the iPhone even when local operators have deployed LTE on spectrum supported by the device, some operators have also expressed frustration that the iPhone does not physically support some of the spectrum they are using for LTE. In Europe, for example, operators are deploying LTE at 800 MHz or 2.6 GHz LTE, bands not supported by the iPhone.
The EC’s inquiry falls short of an official investigation at this point and was prompted by private complaints from carriers. The biggest thing on Apple’s side is that it only has a 20% market share in smartphones in Europe behind Samsung, with Nokia in third, but Nokia is falling in market share all the time as older devices are retired.
The best thing that Apple could do it model its contracts on Samsung’s and be done with it, but there are billions of dollars of sales at stake, and history tells us that Apple will fight this tooth and claw, and that will lead to anxiety and inaction among its senior management, and only put off the inevitable, and help it take its eye off the ball in terms of innovation.