FTC investigating Apple's App Store

Introduction

I'm sure you've heard of Apple products, such as the iPod, iPad, and iPhone. Well, these all run an App Store, where developers can post apps that Apple has approved, either for free or for sale. For paid apps, Apple gets a 30% cut of the price while the developer gets a 70% cut. This same setup is used in the Mac App Store as well.

Subscriptions

The Justice Department and FTC (Federal Trade Commission) are deciding whether the recently announced subscription service in the App Store is violating any United States antitrust laws. It seems as if Apple is forcing media companies' customers into using iTunes and the App Store as a payment source, which in turn gives Apple a 30% cut of the profit. Another big issue with the setup is that the developers are not allowed to have links to outside sources or other places where the customer may purchase content, because it would forgo the App Store as part of the purchase which would then take away Apple's 30% cut. Also, Apple's regulations state that the content can't have different prices at different sources (meaning if you buy directly from the developer's website, it can't be cheaper than buying it in the App Store, but the App Store version can be cheaper than outside versions). The article from The iPhone Blog also brings up a good point; several executives in the music industry are complaining because on top of having to pay the record labels royalties, they will not have to pay an additional 30% for any subscriptions sold in the App Store, which makes for a very anti-competitive business model. In addition to the revenue Apple makes from it's cut from the App Store, Apple also gets a cut from their advertising platform, called iAds. Engadget has posted that Rhapsody's official statement is that they will not comply with the new regulations. A Macworld article feels the opposite way, that there is no antitrust threat to Apple because of various reasons. The article says that in order for this claim to be true, plaintiffs would have to show that the new App Store rules prevent companies from selling their content. "Apple's conduct, while exclusionary, is not anti-competitive. A time-honored axiom in antitrust is that it's meant to protect competition, not competitors." This wouldn't be the first time Apple has been pressured into modifying the App Store's terms, though. As stated in a Rethink Wireless article, Forrester Research CEO George Colony thinks that Apple's success has gone to its head and it is overpricing subscription fees in the iTunes Store, which should be about 5% rather than 30%. Because of this new subscription scheme, Apple may infuriate valuable partners, such as the aforementioned Rhapsody.

In-App Purchases

The other subject the FTC is investigating is the subject of in-app purchases, especially in applications marketed towards children (such as Smurfs' Village). The argument they're making is that many children don't understand the difference between real and virtual purchases. The App Store requires the user to enter their password to complete an in-app purchase, but it saves the password for a short period of time. So, if you enter your password and your child goes to play a game, they can rack up very large amounts of in-app purchases without you even knowing. Back to the example of Smurfs' Village, it offers an in-app purchase called "WAGON OF SMURFBERRIES" for $99.99. Unknowingly, children agree to this and end up charging their parents accounts for large amounts of money.

Opinion

I think that while Apple has some right to a cut of the profit because they are supplying the bandwidth and absorbing credit card transaction fees, 30% is somewhat greedy. Apple recently announced that they've paid $2 billion to developers so far since the App Store has launched, which means their cut is close to $1 billion in revenue from the App Store alone. One justification that Apple does have in taking such a large cut is exposure. Without the App Store, many apps would have the exposure that they do and the ability to conveniently and easily be downloaded to many devices. In conclusion, I believe that Apple isn't justified in taking such a large cut from the app and the actual subscription cost, and that they shouldn't put so many limitations on developers. Often, developers would like to give a cheaper incentive on their own website compared to the App Store because there isn't as much overhead in terms of paying Apple a cut and they get more recognized as a developer. If Apple continues to be so greedy and place this many regulations, eventually the majority of the smartphone market will be saturated with Android devices rather an iOS devices because of the open-ness of the system compared to the highly regulated iOS.

What do you guys think? Do you think that Apple has a right to regulate prices of an application in other places than the App Store? What about Apple forcing all developers to remove outside links from the application? And what do you think about the FTC getting involved? Share your ideas in the comments!