Exclusive gadget: Apple & AT&T antitrust litigation and the iPhone aftermarkets.

AuthorMcMurrer, Matt
  1. INTRODUCTION II. BACKGROUND A. Monopolization B. Relevant Market C. Monopoly Power D. Apple and AT&T 1. The iPhone 2. The Lawsuit E. Handset Openness and Historical Legal Hostility Toward Telephone Hardware Monopolies 1. Landline Handsets 2. Wireless Handsets III. ANALYSIS A. The Apple-AT&T Exclusivity Agreement Creates and Leverages Monopoly Market Power in the iPhone 1. iPhone Relevant Markets 2. iPhone Market Power B. Antitrust Falls Short of Addressing Exclusivity as Broadly as carterphone IV. RECOMMENDATION A. The Court Should Strongly Condemn the iPhone's Technologically Enforced Exclusivity 1. Public Policy Concerns 2. Antitrust Precedent B. Congress Should Enact a "Wireless Carterphone" V. CONCLUSION I. INTRODUCTION

    In 2007, after months of rumor and intrigue, Apple announced the iPhone. (1) Promising seamless integration of iPod functionality with a smartphone, the iPhone quickly became a sought-after gadget. The iPhone boasted a clean, efficient interface in a slick package reminiscent of the iPod Touch. (2) Starting with a capacitive touch-screen to serve as both display and keyboard and internet access over both WiFi and the cellular signal, the iPhone's basic user experience would be shaped by an interface structured around applications launched via widgets on a dashboard-like landing screen. (3) The iPhone would be able to connect to the iTunes Music Store over the cellular network, (4) cutting the store's ties to desktop computers. Concurrently the iTunes Music Store would launch an App Store, where third-party developers could post and sell new applications. (5) With an Internet connection, a microphone, a Global Positioning system (GPs) locator, and a directional gyroscope inside, (6) the iPhone promised endless possible applications.

    As the hype wore off, however, the iPhone's shortcomings revealed themselves. Specifically, it became apparent that the iPhone was one of the least-open smartphones on the market. Apple made the iPhone available for only one provider, AT&T, and prevented software downloads except from the App Store. (7) The iPhone was in many ways the antithesis of the Blackberry, one of the dominant smartphone brands, which is available on nearly all carriers and at the time benefitted from no central software store. (8) The iPhone created a new paradigm for wireless handset exclusivity--poorly publicized and technologically enforced under threat of permanent deactivation of the handset. The antitrust implications of this structure soon became apparent and a class-action lawsuit against Apple and AT&T alleging monopolization over aftermarkets for voice and data service and supplementary applications remains pending in the Ninth Circuit. (9)

    This Note advocates finding the iPhone model in violation of the antitrust laws, and further examination of wireless handset exclusivity in the context of the divestiture of Ma Bell. Part II discusses the origins of monopoly law, the derivation of the concept of secondary markets, and the breakup of AT&T's monopoly on wireline telecommunications in the wake of easing regulation of handset exclusivity. Part III analyzes the iPhone exclusivity agreement and its attendant policies and the creation of a technologically enforced monopoly of a type previously unseen in the wireless industry. Finally, Part IV advocates a remedial course of action integrating judicial and legislative measures to correct and prevent other wireless carriers adopting this scheme.


    Antitrust law can be succinctly described as government regulation of trade practices with the goal of maintaining "free and unfettered competition." (10) Though seemingly contradictive to some, it is founded on the idea that free competition is not a necessary outcome of an unregulated free market, and further that free competition is what will best secure the twin aims of economic efficiency and consumer protection. (11) Born in an era of robber-barons and burgeoning resistance to the very idea of concentrated economic power, antitrust's equity concerns are nevertheless secondary in application to the economic concerns, at least insofar as a competitive market is not necessarily also a "fair" market. (12)

    1. Monopolization

      What is prohibited, specifically by section 2 of the Sherman Act, is the monopolization, or attempted monopolization of "any part of the trade or commerce among the several States." (13) The statutory language is, on its face, vague and open to interpretation to the extent that it neglects to define the key elements. (14) As interpreted by the courts, monopolization under section 2 of the Sherman Act is comprised of "two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." (15)

    2. Relevant Market

      The relevant market is--as a non-contingent component of the first element--the natural starting place for analysis in monopolization cases. (16) In setting the boundaries of a relevant market, courts primarily look to whether the allegedly monopolized good or service has "reasonably interchangeable" substitutes. (17) Interchangeability has two main elements: functional similarity and "'cross-elasticity' of demand." (18) Functional similarity of a product is easily established by "the use or uses to which the commodity is put." (19) In the abstract, for example, the X-widget produced by company A is functionally identical to the X-widget produced by company B. However, "[p]roducts may serve one or more similar functions (e.g., bicycles and automobiles, paper cups and crystal glassware, pocket calculators and personal computers) without being sufficiently close substitutes to be deemed competitors." (20) while bicycles and automobiles both function as forms of ground-transportation, it is unlikely that changes in the prices of automobiles will have a proportionate impact on the sales of bicycles--the two products have a low cross- elasticity of demand. (21) A "reasonably interchangeable" substitute must, therefore, be functionally similar as confirmed by consumer conduct. Thus, insofar as a relevant market is defined by a product or commodity and its substitutes, (22) consumer behavior regarding a product defines its relevant market.

    3. Monopoly Power

      Monopoly power, and its acquisition or maintenance are perhaps best discussed together, despite belonging to separate elements as laid down in Grinnell. (23) Monopoly power is, quite simply, "the power to control prices or exclude competition." (24) This is not to be interpreted as condemning mere market power, however. The Berkey court is careful to emphasize that anticompetitive conduct utilizing that monopoly power is necessary to satisfy the second element of the Grinnell test. In what it calls the "fundamental tension" at the heart of section 2, (25) the court distinguishes between achieving or maintaining monopoly power through "superior product, business acumen, or historical accident," and maintaining monopoly power through the anticompetitive exercise of monopoly power. (26) while a corporation may attain a monopoly through innocent means, and thus not be per se illegal, the market power derived from a monopoly cannot be used to maintain or expand itself.

    4. Apple and AT&T

      on June 4, 2008, a class-action lawsuit was brought against Apple and AT&T. (27) Currently pending before the Ninth Circuit, the case may be an opportunity for confluence in the social and economic goals of antitrust. At issue are two secondary markets associated with the Apple iPhone: wireless service and iPhone software. (28)

      1. The iPhone

        On June 29, 2007, Apple released the iPhone. (29) Beyond the simple combination phone and mobile media player (phone and iPod) functionalities, (30) the iPhone also added robust internet connectivity over both traditional telecom wireless (31) and local wireless (802.11b/g) technologies. (32) The iPhone breaks each core function--phone, messaging, calendar, address book, etc.--into a stand-alone application, or "app," accessed from a central, graphical icon-based menu. (33) When Apple launched its App Store as a part of the iTunes Music Store, it implemented the process for creation and download of third-party software in such a way as to preserve its total control over content. Though Internet access is not limited, the iPhone's firmware (34) blocks installation of any software not downloaded from Apple's App Store. Apple maintains complete control over the App Store catalog, requiring developers to register with Apple, pay a fee, and submit apps to Apple for approval before an app will be made available for download. (35)

      2. The Lawsuit

        The iPhone is sold exclusively for use with AT&T wireless coverage. (36) Despite the software lockout, some early users were able to install unapproved third-party apps. (37) On September 27, 2007, Apple issued an update to iPhone's system software, knowing that it "would 'brick' (render completely inoperable) or otherwise damage some iPhones that were unlocked or which contained unapproved" third party applications. (38) This class-action lawsuit followed. (39) Apple and AT&T have an exclusivity agreement currently valid through 2012. (40) Though Apple and AT&T have kept the agreement itself private, plaintiffs (41) note several key provisions which have been made public:

        [C]ustomers will be forced to renew with [AT&T], despite initially being required to agree to only a two-year contract . . . . Apple will enforce [AT&T's] exclusivity by installing SIM card program locks on all iPhones . . . . [C]ontrary to standard industry practice, by which wireless providers subsidize the purchase of the cellular device in exchange for the consumer signing a contract with the provider conditioned on payment of a fee in the event of early termination, [AT&T] is not required...

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