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Software Developer Policies: Economics and s 46 of the Competition and Consumer Act 2010
MICHAEL D’ROSARIO[*], ANDREW TORRE[**], DANUTA MENDELSON[†] AND LYNDEN GRIGGS[#]
This article considers the impact of developer policies that hinder or restrict cross platform application development. We suggest that policies that hinder or restrict cross platform development have the potential to erode competition within the market for smartphones. The article also considers the relevance of dominance measures in software markets, arguing that conventional economic approaches may not be applicable. Furthermore, while most monitoring activities tend to focus primarily on protection of consumers, the article points out that modern electronic/information technology markets are multi-sided and there is a need for monitoring of practices designed to attract and retain the favour of developers. While the article is written in the context and application of the applicable Australian legislation, this being s 46 of the Competition and Consumer Act 2010 (Cth), our findings are equally relevant to other jurisdictions.
This article critically examines economic and legal, (specifically s 46 of the Competition and Consumer Act 2010) approaches to the concepts of market power or dominance in the information technology age. Though we focus on Australian law when examining regulation of the smartphone industry, our findings, which demonstrate that market-share can be misleading if used as the main indicator of damage to the competitive process, are of general relevance. Likewise, Australian jurisprudence relating to the issue of companies using their substantial market power to eliminate or substantially damage competitors, may provide an example to other jurisdictions of a way to handle the innovation-driven information & communication technology (ICT) industry. The analysis is particularly pertinent in light of the growth observed in the market for ‘smart devices’ that employ embedded operating systems.
Perhaps the most well-known and ubiquitous player in the smartphone industry is the Apple Corporation (Apple). It manufactures iPhones and the accompanying operating system (iOS), combining the two into an ecosystem, with its content platform iTunes. Like the products of its competitors, Apple’s ecosystem can be conceptualised as a portfolio of an individual’s intangible goods; music, photos, documents, which once had a physical presence; as well as a supply of such intangible services as a payments mechanism, banking, and lodgement of documents facility and social network media such as Facebook. In economic terms, all smartphone ecosystems can be described as a two-sided platform market with strong indirect network effects. Apple, Google, Microsoft, and Nokia as providers of the operating system on their respective smartphones,[1] act as intermediaries in the platform provider market, matching the developers who write the software or applications, with the consumers who access content via the platforms.[2] This arrangement reduces the search and coordination costs of applications writers and consumers, since the alternative is for each customer to buy an operating system, install it on the smartphone, and seek out a developer to write an application for it.[3] Indirect network effects mean that as more developers write applications for the platform, more consumers are attracted to it and vice versa.[4]
Until recently, Apple permitted within their marketplace only applications that were produced using their proprietary software development toolkits[5] (SDKs), irrespective of whether the resultant application was superior, inferior or nearly identical to the one produced with alternative toolkits created by other firms (most notably Adobe Systems cross platform SDKs).[6] Apple has recently abandoned this policy and now allows alternative SDKs to be employed in the development of applications for its iOS mobile platform. Apple’s restriction raised the concern that it would lead to decreased competition within the smartphone sector, thus safeguarding its incumbent advantage.[7]
Some commentators,[8] however, defended this restrictive strategy, arguing that Apple did not have a monopoly or dominant position in any market, since its market share for smartphone sales was less than 20 per cent, consequently there should be no competition policy concern. More generally, those who view market competition as a dynamic manifesting Schumpeterian rivalry, whereby winners in the innovation race are invariably able to displace the incumbent(s), consider that compared with the traditional industries, networked information and communication technology industries do not require the same degree of scrutiny and vigilance by the competition authorities. In traditional industries, competition is static and involves small changes in price with the objective of marginally increasing market share.[9] Non-price competition in the form of advertising or technical innovation also occurs, however as with price competition, it is also incremental and has the same objective.[10] Since the usual outcome of a successful dynamic innovation race for the victor is a temporary monopoly, which usually has a higher economic value,[11] there is no antitrust issue.[12]
The purpose of this article is to examine the law and economics of Apple’s developer restrictions with an emphasis on the latter. In the light of these principles, we argue that assessment and characterisation of suspicious firm behaviour solely by reference to rough indicators such as market share may not accurately reflect culpability of such conduct.[13] In particular, in network orientated two-sided markets, there are two problems with the market share approach. First, it may detract from a sufficient consideration of the technology and therefore a failure to appreciate the economic impact of the strategic action. Second, because of competition law’s emphasis on consumer harm, the analysis tends to focus only on the consumer side of the platform, thus ignoring, in this instance the developer side. In order to give a firmer footing to the economic interpretation of damage to the competitive process, we begin with a discussion of the economic function of competition law framed around the measurement of economic value and notions of real and pecuniary externalised costs. This will be followed by consideration of how s 46 of the Competition and Consumer Act 2010 (Cth) would apply where the entity mandates to developers the use of proprietary software development toolkits.[14]
Real and pecuniary externalised costs are often the outcome of economic interactions in a market economy, however only the former are of any consequence for competition policy. An illustration may assist in understanding this. The production of aluminium covers for firm B’s smartphones may serve as an example of a real externalised cost. Dust, one of the by-products of the aluminium polishing process that is emitted into the atmosphere, causes several nearby residents to contract asthma. The costs incurred by these residents (medical costs, pharmaceuticals, discomfort) are not internalised by the firm, which means that they are not taken into account when the profit is computed. Rather they are externalised, borne by the affected residents without their consent and without compensation. Consequently, if firm B is listed on the stock exchange, the adverse impact on the residents will not be capitalised into its share price. The externalised or damage costs are not transmitted (registered) through the market and therefore will not be taken into account in the market’s forward assessment of firm B’s expected profits. In terms of economic theory, since the residents’ costs are not internalised, the output of firm B’s smartphones will be too high and the price too low; consequently there will be over consumption. In effect, the market will over-value the commodity. In countries like Australia, the law of torts through actions in nuisance and/or negligence provides one solution to this problem. If the operators of firm B’s smartphones fail in their duty to take cost effective precautions to minimise foreseeable risk of physical harm to the residents, and the risk materialises, this negligent conduct will render the firm liable for damages under the law of negligence.[15] Under private nuisance, which is a strict liability tort, the affected occupiers of the adjoining premises could ask the court to issue a mandatory injunction against firm B enjoining it to eliminate the nuisance (dust, which substantially and unreasonably interferes with their enjoyment of land).[16] Since the occupiers have suffered injury to health, damages would also be available.[17] Confronting firm B with this additional cost internalises the externalised cost, and provides it with the incentive to manage the risk. The higher price of the smartphone and lower output will then reflect the correct economic value of the product.
Practices that damage the competitive process also generate real externalised costs. In Australia, s 46 of the Competition and Consumer Act 2010 (Cth), broadly prohibits corporations using their substantial degree of market power in a market for inter alia, eliminating, or substantially damaging a competitor.[18] We see equivalent provisions in Europe[19] and the United States of America.[20] The classic example of a competition law (or as it is known in the US, an antitrust) offence is where competitors, monopolists, or oligopolists restrict output and raise price. This strategy imposes costs on consumers without their consent or compensation, and in the process destroys economic surplus, that is not created contemporaneously elsewhere in the economy. In this instance, the real externalised cost problem results in too little consumption of the commodity at too high a price, and therefore an undervaluation of the commodity relative to its true economic value. Competition law, of which s 46 is a central plank, is largely about removing this possibility of under consumption.
The economic value of the production and consumption of a commodity or service is equal to the total expenditure on it plus the consumer surplus. The total expenditure generates an equivalent amount of total income for suppliers, which yields economic rent if it exceeds the costs of production and supply.[21] This rent is the supplier surplus, and is a measure of supplier welfare. The consumer surplus is the difference between consumers’ maximum willingness to pay and the actual price paid, and is a measure of consumer welfare. The sum of the two surpluses measures the additional wealth generated by production and consumption of the item. Injury to competition in the economic sense, only occurs when some or the entire surplus is destroyed, as a consequence of, for example, a supplier(s) misusing market power, or engaging in some other form of anti-competitive behaviour. McHugh J in Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (‘Boral’) made it clear in the context of s 46 of the Competition and Consumer Act 2010 (Cth) that:
While conduct must be examined by its effect on the competitive process, it is the flow on result that is the key, the effect on consumers. Competition policy suggests that it is only when consumers will suffer as a result of the practices of a business firm that s. 46 is likely to require courts to intervene and deal with the conduct of that firm.[22]
The principles of surplus (wealth) creation and destruction are illustrated in figures 1(a) and 1(b) respectively.
In both figures D is the market demand curve, which measures willingness to pay or economic value, S is the market supply curve, which measures economic cost, and P* and Q* is the competitive outcome, where there is no distortion in the competitive process. The economic value of the production and consumption of Q* at price P* in figure 1(a) is equal to A+B+C, where B+C is total expenditure and A is the consumer surplus. Total expenditure is equal to the suppliers’ total revenue, of which C is the total cost of supply including a normal rate of return on capital and B the supplier surplus or economic rent. The net social surplus is therefore A+B, which is the additional wealth, the production and consumption of the commodity generates. Figure 1(b) illustrates the impact of anti-competitive conduct on the competitive process. Suppliers in the market restrict output to Q raising the price to P. The real externalised cost borne by consumers is (-D -G), which is the loss of consumers’ surplus, or uncompensated harm that is the concern of competition law.[23]
Real externalised costs must be distinguished from pecuniary externalised costs, since the distinction provides further insight into the competition process and the role of competition law in maintaining its integrity. When someone’s actions increase or decrease another’s welfare due to a price change, the externalised cost or benefit is pecuniary. Consider a sole vendor who sells ice cream on a beach. Subsequently a competitor establishes himself in close proximity, and the initial vendor consequently loses customers. The loss of some customers to the new entrant imposes a pecuniary externalised cost on the initial incumbent, and an equivalent or larger externalised pecuniary benefit (normal rate of return or economic rent + consumer surplus) on the successful competitor and the new customers. There is no competition concern here, since the new outcome merely reflects market forces. This is very different from the situation portrayed in figure 1(b) where consumer surplus is destroyed and not replaced elsewhere. Similarly, there would be no economic or legal injury if surplus reduction or destruction in one market(s), is offset by equivalent or increased surplus creation in another market(s) in the economy, as a consequence of, for example, the same or a new technologically superior good being supplied by another firm. This economic rationale has been translated into a legal norm via s 46, with its role recognised from its inception. During the debates in the senate on the original Trade Practices Bill in 1974, the then Attorney General said of s 46:
The provision is not directed at size as such. It is confined to the conduct by which a monopolist uses the market power he derives from his size against the competitors or would be competitors. A monopolist is not prevented from competing as well as he is able, for example, by taking advantage of economies of scale, developing new products or otherwise making full use of such skills he has...in doing these things he is not taking advantage of his market power. If this makes it more difficult for rivals to compete or enter the market, this is irrelevant. Securing advantages by economies of scale or scope is not taking advantage of market power.[24]
Using alternative economic language, this means that if the conduct creates an equivalent amount of, or more surplus, it is consistent with dynamic competition and does not constitute damage to the competitive process. Scale and scope economies are two examples of possible strategic behaviour creating extra surplus, and not generating a real externalised cost that necessitates antitrust intervention. There are other examples as well. R&D and patents in high technology industries such as pharmaceuticals and hardware and software, usually create more social surplus than they destroy. This is particularly the case when the technologically inferior product is pushed out of the market. Well known examples include Microsoft Excel replacing VisiCalc and Lotus 1-2-3, and Microsoft Word replacing WordStar and WordPerfect. The contracting market share and leftward shifting market demand curves for these technologically obsolescent products was one side of the dynamics of competition. The other was the expanding market shares and rightward shifting market demand curves of the new substitute products that had been created, and more closely mirrored consumers’ preferences. This expansion in consumer surplus enhanced consumer welfare and is what competition law encourages. Similarly, the increased market share because of informed advertising has exactly the same economic effects.
The Trade Practices Act 1974 (Cth) has today, been superseded by the Competition and Consumer Act 2010 (Cth). However, the provisions discussed in this article have remained essentially the same. They are based on the premise that consumers should be able to get the best product or service for the lowest price possible and that competition is the primary means of achieving this economic goal. Section 2 of the Act explicitly states: ‘The object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.’[25]
The term welfare as used in the legislation appears to approximate economic utilitarianism, which focuses on trade-offs between benefits and costs. Consistent with this interpretation is the fact that the intent of the actor is irrelevant, and that what matters is the impact or effect of the behaviour. So, for example, in the seminal case on s 46 of the legislation, the High Court in Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (‘Queensland Wire’) rejected the argument that the Act was predicated on moral rather than economic considerations.[26] According to Mason CJ and Wilson J: ‘The question is simply whether a firm with a substantial degree of market power has used that power for a purpose proscribed in the section, thereby undermining competition, and the addition of a hostile intent inquiry would be superfluous and confusing.[27]
More recently, this was reiterated by Gummow, Hayne and Heydon JJ in Rural Press Ltd v ACCC[28] who concluded that in regards to s 46:
The words “take advantage of” do not extend to any kind of connection at all between market power and the prohibited purposes described in s 46(1). Those words do not encompass conduct which has the purpose of protecting market power, but has no other connection with that market power. Section 46(1) distinguishes between “taking advantage” and “purpose”. The conduct of “taking advantage of” a thing is not identical with the conduct of protecting that thing. To reason that Rural Press and Bridge took advantage of market power because they would have been unlikely to have engaged in the conduct without the “commercial rationale” — the purpose — of protecting their market power is to confound purpose and taking advantage. If a firm with market power has a purpose of protecting it, and a choice of methods by which to do so, one of which involves power distinct from the market power and one of which does not, choice of the method distinct from the market power will prevent a contravention of s 46(1) from occurring even if choice of the other method will entail it.[29]
In addition to proscribed purpose or effect, the anterior requirements of many of the competition offences under the Act are market definition and the existence of market power or dominance in that market. The Australian judiciary adopted the market-oriented underpinnings of the legislation in Re Tooth & Company Ltd.[30] Deane J, Keely J, JAF Shipton Esq, and Professor M D Brunt, Members of the Land and Valuation Court [Western Australia]) observed that ‘the market is a multi-dimensional concept — with dimensions of product, functional level, space, and time’.[31] Within this market:
competition may proceed not just through the substitution of one product for another in use (substitution in demand) but also through the substitution of one source of supply for another in production or distribution (substitution in supply). The market should comprehend the maximum range of business activities and the widest geographic area within which, if given a sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another. In an economist’s language, both cross-elasticity of demand and cross-elasticity of supply are relevant.’[32]
The court articulated three other economic principles, which have been widely accepted:
1. Time factor: since ‘the market is the field of actual or potential rivalry between firms’, the policy objectives of the legislation dictate that ‘the evidence what is likely to happen to patterns of consumption and production were existing suppliers to raise price or, more generally, offer a poorer deal’ has to be examined from a long-term perspective.
2. Relational concept of competition: since ‘the economy as a whole is a network of substitution possibilities in consumption and production; competition is a matter of degree’. Courts have to consider ‘the outer boundaries of the market’ when determining whether there exist ‘substitution possibilities that firms within its boundaries would collectively possess substantial market power. The question asked is if they were to join forces as a cartel would they be able to raise prices or offer a poorer deal without their market being substantially undermined by the incursions of rivals’.
3. Focus on sub-markets: in relation to competitive behaviour in the form of substitution, it is helpful to identify the relevant sub-markets ‘wherein competition is especially close or especially immediate’. This is because competitive relationships within certain key sub-markets ‘have a wider effect upon the functioning of the market as a whole’.[33]
From this we have essentially seen two definitions of market power used in jurisprudential discourse, but which evolve out of economic principles. The narrower assumes that price is the main basis of competition in the industry, while the broader is predicated on non-price competition, as the dominant mode of firm rivalry. If a firm can profitably set its price too high for a sustained period, then it has economic market power using the ‘price definition.’ In Queensland Wire, the High Court of Australia stated this requirement as: ‘the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product.’[34] It is not clear how high a price it must become before a firm has substantial market power, however Dawson J in the same case inferred that it would need to be raised to the monopoly level or somewhere near to it.[35] Today, we are somewhat assisted by the provisions of s 46(3) of the Competition and Consumer Act 2010 (Cth). This provides that for determining the degree of power that one has in a market, the court must have regard to the constraints on behaviour within the marketplace. These constraints include actual or potential competitors, customers, and suppliers. Whereas the common law had provided some doubt as to the depth of power that one must have, s 46(3C) now clearly articulates that an entity can have market power even though it may not substantially control the market, or cannot act without regard to the actions of actual or potential competitors, suppliers or customers. In the context of the present discussion, this may still see us concluding that an entity without majority market share (such as Apple) may still have market power for the purposes of a s 46 analysis, despite it being able to point to an inability to substantially control the market, or an incapacity to act without regard to the actions of competitors and other third parties. In effect, the entity may have market power without it necessarily being in a monopolistic position.
Traditionally, substantial market power is indicated if structural entry barriers into, and seller concentration in the market are high. The source of this reasoning is the now dated paradigm in industrial organisation known as the structure-conduct-performance (SCP) model, which assumes that there is a stable, causal relationship between the structure of an industry, firm conduct, and market performance.[36] This view of the world was transported into the legal arena through the espousal of a structural checklist by the then Trade Practices Tribunal (now the Australian Competition Tribunal) in Queensland Cooperative Milling Association Ltd.[37] Five structural criteria were laid down:
(i) the number and size distribution of independent sellers, especially the degree of market concentration;
(ii) the height of entry barriers;
(iii) the extent to which the products of the industry are characterised by extreme product differentiation and sales promotion;
(iv) the character of vertical relationships with customers and suppliers, and the extent of vertical integration; and
(v) the nature of any formal, stable, and fundamental arrangements between firms, which restrict their ability to function as independent entities.
The tribunal made the further important point that the most important factor was the condition of entry.[38] In response to this judgment, the initial regulatory authority, the Trade Practices Commission (TPC) (now the Australian Competition and Consumer Commission, ACCC) accepted and provided a detailed rationale for the SCP model in its second annual report in 1976.
Difficult entry into a market is not automatically consistent with the existence of an economically relevant barrier. Economic entry barriers only exist when any potential entrant into the market, who was equally efficient or more efficient than the incumbent(s), would incur a higher cost to supply the same product(s). For example, in the smartphone applications or software industry ease of entry will be facilitated by the availability of programmers, capital, the pace of technological change, the rapid dissemination of information about new products and the low cost of product distribution. Network effects do not constitute economic entry barriers as defined above, however if strong enough, they do make strategic behaviour easier for the incumbent. [39]
Developments in economic theory in the 1980s and 1990s demonstrated that market shares and market concentration revealed little about the level or process of competition in a market because, for example, firms with small market shares could be able to exercise detrimental market power through strategic behaviour, such as creating barriers to entry or expansion.[40] Strategic behaviour ‘occurs when a firm tries to improve its position relative to its rivals by seeking to prevent them from entering a market, to drive them out of business or to reduce their profits’.[41] There have been few empirical studies on the nature and importance of strategic entry barriers in traditional industries. What limited evidence we have derives from the United States of America, the United Kingdom, and Singapore.[42]
Smiley was the first researcher to examine this issue in the US using a questionnaire to investigate strategic behaviour for new and existing products.[43] The study found inter alia, that there was a difference between strategic behaviour in manufacturing and service industries, and that a distinction had to be made between new and existing products in each sector. In broad terms, the most common strategic techniques employed in manufacturing and services respectively, were masking division profitability; the use of patents; and advertising in order to create product loyalty. At the product or service level, advertising and patents were more common for new items; while for existing ones, in addition to advertising, hiding individual profitability data and filling all available product niches, were the main manifestations of strategic behaviour.
A subsequent study in the UK found some similarity in firm tactics, however allegedly, only on the part of a small number of industry incumbents.[44] In the manufacturing sector, the main instruments employed in order of importance were:
(i) R&D (not patenting);
(ii) pricing;
(iii) selling networks; and
(iv) raw material and/or intermediate product supply.[45]
The latest empirical study examined strategic entry barriers in Singapore.[46] The authors found that while structural entry barriers into markets were low, strategic ones were substantial. As in the US, the most popular strategies to deter entry were:
(i) advertising;
(ii) filling all product niches;
(iii) dominating distribution channels; and
(iv) hiding profits.
The legal recognition that market power can be based on strategic or behavioural, rather than structural elements is evident in the dicta of Dawson J in the Queensland Wire case, who provided a number of examples of strategic practices: exclusive dealing, tying arrangements, predatory pricing and refusal to deal, that have the objective of suppressing competition. In his judgment, Dawson J adopted the Kaysen and Turner definition of market power: ‘A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions.’[47]
More recently, this approach was subsequently accepted and applied by a majority of the High Court in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (‘Melway’).[48]
Within conventional ‘desktop’ computing, the emergence of middleware[49] and the use of virtual machines[50] (VMs) have meant that increasingly software operates ‘cross platform’, which has reduced the platform lock evidenced historically. A virtual machine is best understood as a virtual operating system sitting atop the existing operating system, created for the software specification being employed.[51] Middleware software, of which Java is a well-known example, sits between an operating system such as Windows and software that is being run by the user.[52] An example of a system employing Java middleware is the ‘Blackboard learning system’ developed by Blackboard Inc. Particularly popular within North American and Australian universities, it allows knowledge to be accessed on the web rather than in physical spaces such as lecture theatres, enabling web-streaming, forum discussions and content sharing.[53] The Java virtual machine is the intermediary layer that sits between the Windows operating and blackboard learning system, and allows it to work on any computer operating system, (Linux, Windows, or OSX), that runs it.[54] Technically, the Java virtual machine is the translator, facilitating communication between the Java compatible application and the operating system. Java is also hardware and platform independent,[55] because the Java language, (known as the Java bytecode), is written for a specific virtual machine consequently, software utilising Java bytecode can be developed independently from a specific platform.
In the smartphone market, Apple produces both software and hardware and makes most of its revenue from the sale of its iPhone device. It also procures revenue through the sale of applications, games, productivity tools and programs, music and other media content through iTunes, and its newer venture iAds, a cellular advertisement placement service. Google does not produce its own hardware, notwithstanding the release of the Nexus One Smartphone[56] with hardware partner High Tech Corporation (HTC). Rather, Google licenses its software known as Android, gratis to original equipment manufacturers, known as OEMs and original device manufacturers, known as ODMs. The Android operating system is released under the Apache licence, an open source licence agreement. The OEMs and ODMs then manufacture the hardware and employ the licensed software with some adding an alternative user interface to differentiate their product.[57] Google’s profits are earned through its advertising placement business AdMob, which places advertising material within cellular phone applications, through Google search on the cellular devices, and through the sale of applications in the Android marketplace.[58] Developers who produce applications for the Android OS are able to do so using Java, allowing the application to port from one operating system and hardware (electronic computer) architecture to another. This system ensures that the applications can function efficiently on various operating systems and hardware combinations. An Android application with minimal modifications can operate on a Windows mobile, a Blackberry or a Palm device. Until recently, this was not the case for Apple’s developers, who were not allowed to employ ‘third party’ development toolkits, such as the popular Adobe SDK kit, to write applications that could be easily ported from one device to another.
The difference between the Apple and Google approaches can be further contrasted using the following analogy. The Google model is akin to person A communicating with a foreign colleague C, where both parties do not share a common language. Person B serves as the intermediary and translates one of the party’s languages into grammatical structures (syntax and morphology) that the other can understand, and vice versa. If other parties want to listen to the conversation, the translator can convey to them what A or C have said. Using this analogy, B is the translator or ‘virtual machine’; B’s words are akin to the Java bytecode; and C and other interested parties are the various software/hardware platform combinations. The Apple approach meant that only A and C were able to engage in the conversation, and B spoke a language that only B and C could understand. If third parties wanted to benefit from the conversation, a transcribed copy had to be carefully converted into each of their languages. Moreover, Apple’s approach to disallow third party development toolkits was tactically framed around the same analogy. Were the cross platform SDKs allowable, it would have been the equivalent to A conversing with C, and A’s dialect being comprehended by everyone, irrespective of whether or not they understood it.
The developer standards imposed by Apple had three consequences:
(i) the number of applications written for all platforms contracted (the supply of new innovation contracted);
(ii) the rate of growth of the number of applications downloaded contracted; and
(iii) the number of applications released onto Apple’s iOS platform first in time period 1, as a consequence of tying written applications for sale only in Apple’s online shop, increased, giving it a first mover advantage.[59]
Impacts (i) and (ii) can be illustrated using a two quadrant diagram as follows:
Figure 2 illustrates the market for all written and downloaded applications for the entire range of Smartphones available in the market. MV is the economic value of these to consumers or the demand curve, and MC can be interpreted as either the opportunity cost of software developers’ time, or the payment made by the third party for whom the application is written.[60] The starting point is the right hand quadrant. A on the horizontal axis is the number of cross platform applications compiled using cross platform tools and is consistent with all suppliers utilising an open developer policy. Corresponding to A is Q in the left hand quadrant, the growth rate of applications downloaded on all smartphones, in a competitive market. The net social surplus is equal to area +B+C+D, which is the consumers’ surplus. The impact of Apple’s platform restriction on software developers is a tax on their time rather than on their wallets, which is shown as an upward shift of the MC line to MC*. With Adobe SDK, developers can write four applications at the same time, or alternatively use Java and write applications that work on four platforms. When Apple prohibited their developers from using either SDK, effectively only one application could be written at a time, considerably reducing developers’ labour productivity. This diminution in productivity translated into a reduction in applications written for all other platforms, such as Android from A back to A*, and consequently, the rate of growth of applications downloaded decreased from Q to Q*, since there were now fewer in the ecosystem. Social surplus equal to –C –D is destroyed, which is the relevant economic and legal damage to the competition process.[61] A compensating or larger surplus equal to –C –D is not immediately forthcoming in any other market. Clearly, Apple’s restriction placed on developers harmed consumer interests, which is only evident by analysing the economic impact on the former group. This is despite Apple’s relatively low market share in the smartphones market. However, irrespective of the utility of a market share measure, in the two-sided platform framework, that we have been analysing, is this the relevant market? In Boral[62] McHugh J stated that: ‘The terms of the Act have economic content and their application to the facts of a case combines legal and economic analysis. Their effect can only be understood if economic theory and writings are considered.’[63]
Allied to this is s 4E of the Competition and Consumer Act 2010 (Cth), which reads:
For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.
Referring to the similarly worded s 4E in the Trade Practices Act 1974, McHugh J explained:
The concepts of substitution and competition to which s 4E of the Act refers require an analysis of the nature and characteristics of each product alleged to compete in the one market. This analysis is a necessary step in determining whether consumers or producers can replace one product with another without a great deal of difficulty in response to price or condition changes. This is termed the cross-elasticity of demand or supply respectively. A high cross-elasticity of demand indicates close substitutability. Two products that are perfect substitutes would have an infinite cross-elasticity of demand: an increase in the price of one would result in a total consumer shift to the other product. Products that are not interchangeable have a cross-elasticity of zero: the price of one has no effect on sales of the other product.[64]
Noting that ‘[i]n determining the ambit of the market, the cross-elasticities of both supply and demand are relevant’,[65] McHugh J emphasised that:
the market is the area of actual and potential, and not purely theoretical, interaction between producers and consumers where given the right incentive — a change in price or terms of sale — substitution will occur. That is to say, either producers will produce another similar product or consumers will purchase an alternative but similar product.[66]
Smartphones and applications written for different platforms by software developers are certainly not substitutes in consumption. Rather, since their cross price elasticity of demand is zero, they are economically classified as complementary goods and legally and economically constitute distinct markets. As such, it is pertinent to provide a more appropriate delineation of the markets that will frame the current analysis and guide future research. Each market for smartphone applications is constituted by a ‘native’ component and a ‘cross platform’ component. In the case of the iTunes marketplace, the native component is best understood as the total number of applications written using the xCode SDK, while the cross platform component would be best understood as the total number of applications that were developed using alternative ‘cross platform’ compilers such as Adobe’s cross complier in the new Adobe Creative Suite, and other popular compliers such as Gambit Scheme, Titanium, MonoTouch, and Unity3D. A number of the most popular applications on the iTunes marketplace employed cross platform compilation tools in their development. Given this, markets for smartphone applications are largely distinct from one another, with the platform provider (the producer of the embedded operating system) being dominant in their controlled applications marketplace, notwithstanding the interdependent ‘cross compiled’ application component. Therein Apple’s iTunes marketplace constitutes a market that is distinct from other smartphone marketplaces.
When considering the interdependent portion it is pertinent to consider factors influencing application development. As with most multi-sided market frameworks, developers desire large user bases, and the ability to employ their technical acumen to procure a profit. Users find large application marketplaces desirable. Consistent with other multi-sided platform markets, the growth of one side promotes the growth of the other. Developers would initially favour established application marketplaces over emergent platform marketplaces, because of the greater potential to procure a profit. Given these incentives, initially the cross platform component of emerging operating systems’ application marketplace is likely to be larger than native component (with application development for newer marketplaces potentially occurring concurrently to application development for established marketplaces). Apple has significant influence over the ‘cross platform’ market segment given its iTunes marketplace size advantage over newer operating systems’ marketplaces. By structuring its business in this way, Apple’s decision to disallow cross platform compiling deterred developers from engaging in development for other platforms through cross platform compliers, or at the least potentially deferred development on other platforms in favour of its own platform, with no reasonable technical justification.[67]
The above analysis of the interaction between law and economics, begs the question: would Australian law consider Apple’s software developer restriction as being sufficiently damaging to the operation of the market for smartphone applications to be a misuse of market power? In order to show misuse of market power under s 46, the regulator, or a competitor of Apple must show:
(i) a substantial degree of market power;
(ii) the power must be taken advantage of; and
(iii) it must do so for the purpose of damaging or eliminating a competitor, preventing a person from entering a market, or deterring a person from engaging in competitive conduct.[68]
Market power must start from the view that the more broadly the market is defined, the less likely it is that a corporation such as Apple will possess market power in that market. However, given the inextricable links that exist between the hardware and the software within the smartphone market, and the express direction that s 46 provides to consider the leverage that a party has in one market to misuse power in another,[69] a plausible arguments exists to find that at least Apple does possess market power given the aforesaid restrictions on its platform use. However, it should be noted that the power must also be substantial with this meaning ‘considerable or large.’[70]
In the instant matter, the firm’s market power in the latter market (cross-complied and or applications employing external or interpreted code) is consequential to its power within the former market (iOS/iTunes). Essentially firms with large and established marketplaces will be attractive to application developers given their profit potential. Consequently, developers will develop for such platforms first or concurrently to other less established marketplaces, assuming that cross platform compiling is permissible. As such, the decisions of major platform providers influence the level of cross platform compiling and, by implication, application development on less established marketplaces. Given this, it is at least arguable that Apple would comfortably meet the threshold tests given these assumptions. If a broader market definition were adopted, for example subsuming other mobile operating system marketplaces, Apple would still likely meet the substantial market power threshold, particularly through its capacity to leverage its market power. For example, a proximate market that may serve as a better example of Apple’s power is the control that it can place and restrictions it can impose on smartphone developers. Apple’s developer policy would leverage its market power within each of these related markets. It is pertinent to acknowledge that within multi-sided market frameworks each market actively influences other relevant markets. For example, Apple’s application marketplace dominance promotes its application developer market dominance.
Once market power is established, the second element demands that the firm take advantage of this market power. Simply put, this means to ‘use’ that market power.[71] The term is not pejorative in context. The question being asked is whether the entity concerned would be able to act in the way it has under competitive conditions — this being colloquially known, though the phrase is not used in the legislation, as the counterfactual. Can Apple point to a legitimate business justification for any argument that it has not taken advantage of market power?[72] More recently, debate asks whether the behaviour ‘would’[73] or ‘could’[74] have been engaged in under competitive conditions, with the most recent High Court authority conflating the two: ‘could’ the corporation only engage in the conduct because of its substantial market power, and ‘would’ it be very unlikely to engage in the conduct without substantial market power?[75] The legislation also appears to endorse either or both tests as possible approaches.[76] Another possibility is to ask whether the conduct was materially facilitated by the existence of the market power.[77] Conduct designed merely to protect market power will not breach the legislation.[78]
In the context of the subject matter of this paper, it might be argued Apple could have adopted developer policies that restricted application of the software notwithstanding competitive conditions. However, absent its dominant marketplace position adopting such an approach would have been highly detrimental to its competitive position. What would have resulted without its market strength would be developer movement towards other platforms and fewer native and cross-complied applications within its iTunes marketplace. In this sense, the ‘would’ approach is more supportive of a s 46 infringement given s 46(6A). It is apparent that under competitive conditions the firm would not conceivably adopt such stringent developer policies because developers would not be beholden to them. Therefore, the submission we make is that the argument is plausible that the developer policies of Apple were made possible by its market power.
To provide further support for this argument, consider the behavior of Apple where it indubitably operates under competitive conditions — this being desktop operating systems. In this market where Apple has a substantial but minority share with its OSX platform, Apple operates in the opposite manner. Apple actively moved to the Intel x86 architecture from its RISC processor architecture to support emulation, cross platform development with this allowing, not only the employment of Windows applications on Apple’s hardware, but also the possibility that Windows be executed natively on Apple hardware.
It should also be noted that Apple allows cross platform compiling and the execution of virtual machine software/middleware on its desktop operating system OSX, with both OSX and iOS based on the UNIX like kernel. Indeed iOS derives heavily from OSX with both sharing a Darwin foundation. Interestingly, this approach is diametrically opposed to the approach that the firm has taken in the market for embedded systems, with iOS. So the firm’s two highly similar, indeed related operating systems incorporate very different developer policies in relation to the use of interpreted code, middleware, and cross-complied software. The fact that they do this lends weight to the argument that they may have, or be, taking advantage of its market power.
The final element is that the substantial market power must have been used for one of the proscribed purposes of s 46(1) of the Competition and Consumer Act 2010 (Cth). What is meant by purpose is intent to achieve a particular result.[79] In determining purpose, the requisite proof may be met by inference from ‘the conduct of the corporation or any of any other relevant person or from other relevant circumstances.’[80] Nor does the proscribed purpose need be the sole purpose.[81]
How do we determine Apple’s purpose? First, as noted above, it is relevant to note Apple’s conduct in proximate markets where it is not dominant and, equally, to consider plausible defences of its approach. Apple’s behavior within competitive markets (eg, for its OSX desktop platform) is diametrically opposed to its behavior in the context of iOS. Upon the rise of Android in terms of market share and the development of new compiling software by major rival Adobe, Apple moved quickly to change policy and disallow cross platform development and use of external scripts. Arguably, this response resulted from a competitive threat.
However, Apple may argue that it was merely demanding software developers to produce software that complies with its technical specifications to ensure security, stability, with this maintaining the Apple brand. However, there are a number of facts that undermine such a proposition. First, cross platform development using virtual machine software has been conducted for a significant period and has been proven to be robust. Second, Apple allowed cross platform compiling for a significant period prior to the change, with no notable difference in the performance of applications complied ‘natively’ and those employing interpreted code, gaming engines, or cross complied code. Third, the most popular and robust applications on the iTunes marketplace were those employing significant amounts of externally compiled code/cross platform code sequences. Finally, as noted, both iOS and OSX are highly related, and the approach taken to OSX in relation to cross platform compiling, middleware, and the use of virtual engines is inconsistent with the approach taken in regard to iOS. This heavily undermines the notion that cross platform compiling and/or interpreted code, or the application of a virtual engine create genuine security or stability issues.
In conclusion, the developer policies of Apple, (now altered) had two deleterious effects for rival entities in two separate markets. Firstly, its actions significantly damaged developers of cross compiling software. On one possible view, Apple appeared to employ its marketplace dominance to the detriment of rival software development toolkit providers. Secondly, Apple’s actions arguably damaged rival smartphone application marketplaces by deterring or deferring application development on rival marketplaces. Given the ubiquitous nature of ‘smartdevices’ today, the regulators should tread warily in allowing policies that underlie these products to go unscrutinised.
As we have documented, it is arguable that technology giants such as Apple have employed a strategy that strategically created economic entry barriers, and artificially increased production costs. However, these two strategies can also be used without imposing real externalised costs. If a monopolist is able to identify each consumer’s maximum willingness to pay, it will increase its profits by price discriminating and charging consumers different prices. The outcome is extra output, consequently, even though the extra surplus created is seller surplus, the integrity of the competition process in the economic sense is enhanced, not diminished. Bundling and tying of related goods could also lower firm costs by enabling them to garner economies of scope. For example bundling photocopy paper with a photocopier or tying the sale of the photocopier to the sale of the paper can reduce marketing, management and advertising costs and create surplus, since the products can be distributed together.[82]
Challenges arise where such behaviours result in the tying of desirable goods (or services) with undesirable ones, to the detriment of competition and the consumer. Moreover, in the context of two-sided markets it is critical to remember the often forgotten non-consumer segment, in our case study the developer community. If it is evident that the actions of Apple increased the cost of production to the developer unjustifiably, this would have been detrimental to consumers and developers alike.[83] A plausible motivation for such a developer policy would have been a general desire to stifle the development of cross platform frameworks and consequently development, within other marketplaces for smartphone applications. If the policies of the firm[84] were framed because of a desire to create artificial barriers to entry, for developers of software development toolkits[85] there were, and indeed are, likely to be antitrust implications. While the new policy positions might assuage regulators to an extent, it is unlikely that they will invalidate or diminish the reservations about the impact of this type of developer strategy.[86] It is evident that economists and policymakers alike must come to terms with the unique nature of platform enterprises and modern multi-sided markets. In modern times, it is likely that practices designed to capture the market through the creation of artificial barriers to entry are equally likely to manifest on the developer side of a multi-sided market as they are on the consumer side. Thus modern multi-sided markets appear to demand careful definition and shrewder monitoring of practices designed to attract and retain the favour of developers[87] where these appear to be motivated by a desire to stifle new innovators and effective competition, at the expense of both the consumer and developer community.
[*] Lecturer, School of Accounting, Economics & Finance, Deakin University.
[**] Lecturer, School of Accounting, Economics & Finance, Deakin University.
[†] Chair in Law (Research), School of Law, Deakin University.
[#] Senior Lecturer, Faculty of Law, University of Tasmania.
[1] Alternatively, the operating system may be installed on OEM (Original Equipment Manufacturer) devices, or other third party devices.
[2] An analogy in real space is the owner of a shopping centre who brings together customers and retailers. The example commonly proffered in the literature is the dating club scenario where the club promoter brings together two groups with opposite interests.
[3] Similarly, the owner of the shopping centre reduces retailer and customer search and coordination costs by bringing the two together at a single location.
[4] Indirect are distinguished from direct network effects. The latter refer to cases where the consumer’s utility depends directly on the number of users connected to the same network. The classic example is a telephone network, which becomes more valuable as more people use it. In the case of an indirect network effect, the nexus between consumer utility and the number of users occurs through a complementary good. For example applications written for iPhones, which are complementary goods, become more valuable as more iPhones are bought.
[5] Xcode is Apple’s proprietary toolkit for the development of applications for iOS and MAC OSX.
[6] There are several further cross platform code compiling development toolkits, which were also adversely affected by the decision. Some proponents of cross platform environments noted that the code outputted by the cross platform compilers could in theory be identical to that of the iOS SDK, but nonetheless be disallowed entry into Apple’s marketplace (iTunes).
[7] This change in policy was detailed in the iOS Developer Agreement at section 3.3.1 and 3.3.2: 3.3.1— Applications may only use Documented APIs in the manner prescribed by Apple and must not use or call any private APIs. Applications must be originally written in Objective-C, C, C++, or JavaScript as executed by the iOS WebKit engine, and only code written in C, C++, and Objective-C may compile and directly link against the Documented APIs (eg, Applications that link to Documented APIs through an intermediary translation or compatibility layer or tool are prohibited).
3.3.2 – An Application may not itself install or launch other executable code by any means, including without limitation through the use of a plug-in architecture, calling other frameworks, other APIs or otherwise. No interpreted code may be downloaded or used in an Application except for code that is interpreted and run by Apple’s Documented APIs and built-in-interpreter(s).
[8] See for example, J Gans, ‘Apple’s Media Core’, The Age (Melbourne) 13 April 2010.
[9] D Teece and M Coleman, ‘The Meaning of Monopoly: Antitrust Analysis in High-Technology Industries’ (Fall-Winter 1998) The Antitrust Bulletin 801.
[10] D Evans and R Schmalensee, ‘Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries’ (National Bureau of Economic Research (NBER) Working Paper, No 8268, May 2002).
[11] The superior product or service generates more economic surplus than the displaced alternative(s).
[12] Economic surplus in this instance is created not destroyed. Economic value and its assessment will be discussed subsequently.
[13] Gans’ article commenting on Apple’s low market share for Smartphones, as indicative of its closed developer policy not posing a competition policy or law concern, has arguably indirectly resorted to the same reasoning. See Gans, above n 8.
[14] For reasons of length, this paper will not consider the application of ss 45 (collusive behaviour) and s 47 (exclusive dealing) of the Competition and Consumer Act 2010 (Cth). For consideration of the latter, see Dale Clapperton and Stephen Corones, ‘Technological Tying of the Apple iPhone: Unlawful in Australia?’ [2007] QUTLawJJl 21; (2007) 7(2) Queensland University of Technology Law and Justice Journal 351.
[15] Civil Liability Act 1936 (SA), s 32(2); Civil Liability Act 2002 (NSW), s 5B(2); Civil Liability Act 2003 (Qld), s 9(2); Civil Liability Act 2002 (WA), s 5B(2); Civil Liability Act 2002 (Tas), s 11(2); Civil Law (Wrongs) Act 2002 (ACT), s 43(2); Wrongs Act 1958 (Vic), s 48(2) each provides that ‘(1) A person is not negligent in failing to take precautions against a risk of harm unless: (a) the risk was foreseeable (that is, it is a risk of which the person knew or ought to have known), and (b) the risk was not insignificant, and (c) in the circumstances, a reasonable person in the person’s position would have taken those precautions. (2) In determining whether a reasonable person would have taken precautions against a risk of harm, the court is to consider the following (amongst other relevant things): (a) the probability that the harm would occur if care were not taken, (b) the likely seriousness of the harm, (c) the burden of taking precautions to avoid the risk of harm, (d) the social utility of the activity that creates the risk of harm.’ See also: Adeels Palace Pty Ltd v Moubarak [2009] HCA 48; (2009) 239 CLR 420.
[16] Cambridge Water Co v Eastern Counties Leather PLC [1993] UKHL 12; [1994] 2 AC 264.
[17] See for example: R v Rimmington [2005] UKHL 63; [2006] 1 AC 459, 467 (Lord Bingham of Cornhill, Lord Nicholls of Birkenhead, Lord Rodger of Earlsferry, Baroness Hale of Richmond and Lord Brown of Eaton-under-Heywood in agreement); Halsey v Esso Petroleum Co Ltd [1961] 1 WLR 683; Lester-Travers v City of Frankston [1970] VicRp 1; [1970] VR 2.
[18] Auskay International Manufacturing & Trade Pty Ltd v Qantas Airways Ltd [2010] FCAFC 96; (2010) 188 FCR 351.
[19] Treaty Establishing the European Economic Community, opened for signature 25 March 1957, 298 UNTS 11 (entered into force 1 January 1958) (‘Treaty of Rome’) Article 86.
[20] Sherman Act 1890, 15 USC §§ 1-2.
[21] Included in the total cost of production or supply is a normal rate of return on invested capital in the business (what could be earned in the next best alternative use of those funds, or the opportunity cost of those funds). Any excess return is called economic rent or excess profit.
[22] [2003] HCA 10; (2003) 215 CLR 374, [261].
[23] On the units 0 to Q, suppliers gain additional surplus equal to area G (transfer from consumer surplus), as a consequence of the price rise to P, which exceeds their loss on the units Q to Q* equal to area E. Therefore there is a net gain in surplus to this group, since G > E. However, to reiterate, the net impact on suppliers’ welfare is of no concern to the law, since it is considered to be the outcome of competitive rivalry, and not requiring legal protection. The focus of trade practices legislation is competition.
[24] Commonwealth, Parliamentary Debates, Senate, 14 August 1974, 923.
[25] This policy objective was recently reiterated by a majority of the High Court: Boral [2003] HCA 10; (2003) 215 CLR 374, [87].
[26] [1989] HCA 6; (1989) 167 CLR 177, see generally the judgement of Deane J.
[27] Queensland Wire [1989] HCA 6; (1989) 167 CLR 177, 191.
[28] [2003] HCA 75; (2003) 216 CLR 53, [51].
[29] A firm is therefore entitled to protect its market power using a method distinct from the market power itself, for example by spending money on extensive advertising. Presumably, firms without market power can also advertise in order to try to acquire some.
[31] Ibid 39.
[32] Ibid 38-39.
[33] Ibid.
[34] Queensland Wire [1989] HCA 6; (1989) 167 CLR 177, 188 (Mason CJ and Wilson J. See also Dawson J at 199).
[35] Ibid, 200. See also Boral [2003] HCA 10; (2003) 215 CLR 374, [252] (McHugh J).
[36] J Church and R Ware, Industrial Organization: A Strategic Approach (Irwin McGraw-Hill, 2000). Market performance is judged by the ability to raise price above marginal cost, ie to exercise market power.
[37] (1976) 25 FLR 169 (QCMA).
[38] Re Queensland Co-operative Milling Association Ltd and Defiance Holdings (1975) 25 FLR 169, 320.
[39] For a discussion of entry barriers in software markets see US v Microsoft, Direct Testimony of Richard L Schmalensee, US District Court for the District of Columbia, Civil Action No 98-1232 (TPJ); referred to in United States of America v Microsoft Corporation (1999) 84 F Supp 2d 9, 101, [370]-[372]; extensively analysed in W R Dunham, ‘The Determination of Antitrust Liability in United States v Microsoft: The Empirical Evidence the Department of Justice Used to Prove Its Case’ (2006) 2 Journal of Competition Law and Economics 549-672. See also ACCC v Boral Ltd (2001) 106 FCR 328, [340]-[342].
[40] R Smith and D Round, ‘The Puberty Blues of Competition Analysis: Section 46’ (2001) 9 Competition and Consumer Law Journal 189.
[41] R Smith and D Round, ‘A Strategic Behaviour Approach to Evaluating Competitive Conduct’ (1998) 5(1) Agenda 25.
[42] None appears to exist for network industries.
[43] R Smiley, ‘Empirical evidence on Strategic Entry Deterrence’ (1987) 6(2) International Journal of Industrial Organisation 167.
[44] S Singh, M Utton and M Waterson, ‘Strategic behaviour of incumbent firms in the UK’ (1998) 16(2) International Journal of Industrial Organisation 229. The authors distinguish between ‘taking account of competitors’ and ‘acting strategically towards them’ (at 231).
[45] The last two categories are actioned by signing long-term contracts with customers, intermediaries, or wholesalers.
[46] H Chang and F Tang, ‘An Empirical Study on Strategic Entry Barriers in Singapore’ (2001) 18(4) Asia Pacific Journal of Management 503.
[47] Queensland Wire [1989] HCA 6; (1989) 167 CLR 177, 200.
[49] This represents a significant shift in computing with ‘virtual layers’ existing between the desktop operating system and the user. This means that similar user experiences and similar software packages can be made available on different operating systems. Eg a Java based application can operate on Windows, Linux, and Mac OS based systems because the application operates through a virtual engine/platform that each operating system is able to execute.
[50] A virtual machine is best understood as a software program that emulates or executes programs and/or processes of another machine architecture. Virtual machines fall broadly into two categories system virtual machines and process virtual machines. System virtual machines enable multiple operating systems to operate on the same hardware. Process virtual machines operate within the host operating system as another application, and enable platform independent application development. Through a process virtual machine an application can be developed that will run on any system capable of executing and running the virtual machine application.
[51] This is to be contrasted with the platform specific approach, where the language is compiled to a specific machine code.
[52] When Windows is activated, it sends a message to Java telling it to activate.
[53] Other popular applications of Java Virtual Engine include video conferencing and online gaming.
[54] Android adopts a near identical VM to Java known as the Dalvik VM, thus making it easier for Java based applications written for the Java VM to be ported for the Dalvik VM on Android.
[55] The essential requirement is that the hardware and operating system paring can utilise the Java virtual machine.
[56] More recently the development of the Nexus S with Samsung.
[57] Sense UI from HTC is the most successful. Sense UI is a brand name.
[58] Ad Mob is a subsidiary that runs the advertisements.
[59] This is a much better measure of market dominance than the market share of Apple’s smartphones.
[60] Many software developers write applications as a hobby; alternatively professionals are engaged by third party firms, such as newspaper companies, who request that the application be written for them. Apple for example, pays the software writer 70% of the sale price of the application and keeps the remaining 30% itself.
[61] Without the restriction net surplus equals +B+C+D, with the restriction it contracts to B, consequently the loss is –C–D.
[62] [2003] HCA 10; (2003) 215 CLR 374.
[63] [2003] HCA 10; (2003) 215 CLR 374, [274].
[64] [2003] HCA 10; (2003) 215 CLR 374, [250].
[65] Ibid [251].
[66] Ibid [252]. According to McHugh J, given that most products could be regarded as ‘substitutes for one another’, in order to avoid understating the market power, s 4E ‘should be taken to require close substitutability’. Such ‘[c]lose substitutability and competition are evident when more than a few consumers switch from one product to another on some occasions’. His Honour referred to Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313, 332 (Lockhart, Wilcox and Gummow JJ, citing Queensland Wire [1989] HCA 6; (1989) 167 CLR 177, 188 (Mason CJ and Wilson J)); United Brands Co v Commission of European Communities [1978] ECR 209, [22]-[44]; Hoffmann-La Roche & Co AG v Commission of European Communities [1979] 3 CMLR 211, 272.
[67] It should also be noted that Apple allows cross platform compiling and the execution of virtual machine software/middleware on its desktop operating system OSX, with both OSX and iOS based on the UNIX like kernel. Indeed iOS derives heavily from OSX with both sharing a Darwin foundation. As such, this heavily undermines the potential claim that cross platform compiling and/or interpreted code, or the application of a virtual engine create genuine security or stability issues. Moreover, Apple’s recent reversal of its iOS developer policies (3.3.1 and 3.3.3) lends further weight to the claim that the change was not consequential to robustness or security concerns.
[68] It should be noted that any exemption in relation to use of the intellectual property of Apple would not be possible under s 46 of the Competition and Consumer Act 2010 (Cth). See s 51 of the same Act.
[69] See generally Stephen Corones, ‘Sections 46(1) and 46(1AA) of the CCA: The Struggle of the Small Against the Large’ (2009) 37 Australian Business Law Review 110; Geoff Edwards, ‘Small Business Reforms to Section 46: Panacea, Placebo or Poison?’ (2006) 34 Australian Business Law Review 255.
[70] Eastern Express Pty Limited v General Newspapers Pty Ltd (1992) 35 FCR 43, 46.
[71] Queensland Wire [1989] HCA 6; (1989) 167 CLR 177.
[72] Boral [2003] HCA 10; (2003) 215 CLR 374.
[73] Melway (2001) 205 CLR 1.
[74] Rural Press Ltd v ACCC [2003] HCA 75; (2003) 216 CLR 53; Daniel Clough, ‘Misuse of Market Power – “Would” or “Could” in a Competitive Market?’ (2001) 29 Australian Business Law Review 311; Frank Zumbo, ‘The High Court’s Rural Press Decision: The End of s 46 as a Deterrent Against Abuses of Market Power?’ (2004) 12 Trade Practices Law Journal 126.
[75] NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90.
[76] Section 46(6A) Competition and Consumer Act 2010 (Cth).
[77] Section 46(6A) Competition and Consumer Act 2010 (Cth). See Joshua Gans, Rajat Sood and Phillip Williams, ‘The Decision of the High Court in Rural Press: How the Literature on Credible Threats May Have Materially Facilitated a Better Decision’ (2004) 32 Australian Business Law Review 337.
[78] Rural Press Ltd v ACCC [2003] HCA 75; (2003) 216 CLR 53, [51].
[79] Queensland Wire [1989] HCA 6; (1989) 167 CLR 177.
[80] Section 46(7), Competition and Consumer Act 2010 (Cth).
[81] Section 4F, Competition and Consumer Act 2010 (Cth).
[82] If price is lowered as a consequence consumer surplus will be created.
[83] Some defenders may cite issues such as quality of offering in support of Apple’s position but this is contrary to reality for both developers and consumers. Many of the best applications within the iTunes marketplace would appear to employ cross platform complied code/interpreted code, and/or cross platform engines, particularly in the area of gaming. Consider for example Dungeon Hunter employing Python, Skee Ball employing Unity, Earthworm Jim employing Lua, and Zombieville employing Unity3D(C#/Boo). These are all examples of popular applications receiving significant industry praise for their usability, functionality and commercial success.
[84] The former 3.3.1 and 3.3.2 in the iOS Developer License Agreement.
[85] Such as Adobe’s cross platform compiler, and other popular compilers like Gambit Scheme, Titanium, MonoTouch, and Unity3D.
[86] This observation applies a fortiori when the timing of Apple’s decision is also considered. The restriction was announced when the firm was observing significant growth in competitor market share with the rise of Android and at a time where rival software development toolkit provider Adobe (amongst a number of competitor firms) was framing an alternative SDK.
[87] Alternatively, in the context of other examples (cable television, electronic books, on demand digital video), the non-consumer side.
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