Apple Corp: Devil or Angel?

My partner sent me a recent article from the New York Times written by Randall Stross, entitled, "Want an iPhone? Beware the iHandcuffs."

The essence of the article is that Apple (Computer) Corporation has behaved insensitively and arrogantly in its design of the iPod product line, and its iTunes online music store. At issue is the management of copyrights, use of purchased music by the user, and the copying of music tracks.

Within days, ironically, Alan Murray, managing editor of the Wall Street Journal, weighed in, both on CNBC and in print, on the personal arrogance of Apple's CEO, Steve Jobs.

My partner went so far as to suggest, as we discussed the article, and this post, that Apple is guilty of a Robinson-Patman and/or Clayton Act violation on the basis of "tying."

I may be in the minority here, but I don't really believe Apple has: a) done anything illegal; b) done anything inherently wrong, and/or; c) behaved in some 'evil' manner.

My contention is that those who would substantially innovate existing products, or bring to market large-scale new products, of necessity, must make provisions for entire systems of products and services. As such, in order to even offer the products or services, they must design and be responsible for, at least initially, the provision of all the components for the system. In order to make this profitable, the innovating company will appear to be overly-concerned with control of the components of the system, and will also appear to not care about its interoperability with other systems, without which, the innovative system may function effectively.

Let me mention a few other examples of this phenomenon: Edison's electric power system, Westinghouse's competing alternating current electrical power system, General David Sarnoff's RCA Corporation television broadcasting and viewing system, and Phillips' audio cassette technology.

In all of these prior examples, an innovative company had to provide for a complete system in order to offer a sensible value proposition to multiple user classes.

Take television, for example. To market television, RCA had to design, produce, test and manage the input devices- cameras, amplifiers, processors, broadcasting equipment- network equipment, and receiving devices- televisions. The company had to design, sell and operate a standardized system of equipment, in order for television stations and viewers to be assured that their products would work correctly as part of the heretofore nonexistent system.

Apple did something similar for music some six years ago. Prior to iPods, we bought music at $14-18/disc, as an entire album. If you wanted one or two songs on an album, tough luck. You had to buy the whole thing, to buy it legally.

Then along came Apple's iPod and iTunes online music store. Mind you, prior to that, nobody could figure out how to shake the music industry out of its lethargy, as technology seemed poised to illegally 'solve' the music purchase problem that users had- how to buy individual tracks of music.

Do Apple's products use a different, proprietary encoding process for its iTunes music? Yes. Are Apple's products the only choices for playing digitally-encoded music? No.

Microsoft, Sandisk, and several other vendors also offer MP3 digital music players. And, hey, you can always dust off your CD player. Nobody's putting a gun to anyone's head to force them to buy an iPod. Or use iTunes.

Even when you buy an iPod, there is no "tying" arrangement which forces you to buy anything on iTunes. Unlike the original "TBA" (for tires, batteries and accessories) tying cases, for which the Clayton Act was used to halt the practice, Apple requires no purchase from or of one product, in order to use another. iTunes may be used to buy music, by the song, and play it on your PC. Or to record it onto a CD. You needn't have an iPod to use iTunes. Similarly, you may rip your existing CDs, using iTunes, into tracks to store on your iPod. But no 'purchase' is required to do this, aside from the original iPod purchase.

This system has been so successful that Microsoft, RealNetworks, and eMusic all now compete to offer online music. The consumer has choices.

In fact, the closing paragraph of Mr. Stross' article reads thusly,

"Pointing to South Korea, where copy protection has disappeared, Mr. Goldberg invoked the pithy aphorism attributed to the author William Gibson: “The future is here; it’s just not widely distributed yet.” "

I contend that, without its closed system, Apple would have had little economic reason to innovate with its iPod/iTunes system in the first place. Is it really bad for innovation to be restrictive and controlled at first, if, without such restrictions, the innovation never occurs?

This is the central argument in patent policy and law. How much protection is sufficient to produce innovation and growth, societal advancement, and how much is too much, which strangles emerging technologies.

Closed systems initially assure revenue and profit for the innovator. In time, if the innovation is useful, but deemed too restrictive, others will typically get around the technology issues.

Or, if the technological barriers are too heavily relied upon, they may be simply leapfrogged. Landline telephony's stranglehold on the communications network was eventually supplanted by wireless technology, resulting in the value of those landline telephone companies plummeting far more rapidly than was imagined. The entire anti-trust efforts against the industry during the 1980s and 1990s has all been for naught, as AT&T has now been reassembled, albeit with far less monopoly power than it had twenty years ago.

Music and entertainment is far less concentrated, as an industry sector. Already, other product solutions for listening to music are available which do not involve Apple's products. Therefore, for people to continue to complain about Apple's product strategy, vis a vis its copy management aspects, suggests that Apple's offerings still retain certain unique features, but these complainers do not wish to accept the terms of purchase and use of an iPod or iTunes.

Maybe it's me, but I simply see nothing illegal in Apple's actions. It's smart product management policy. They have constructed a legal, technological barrier which provides them with price maintenance benefits, but stops far short of being an illegal monopoly.

It may be argued that iPod profits funded the iPhone and AppleTV. Both are likely to influence and affect, respectively, communications and video entertainment. Does anyone think that an iPhone will only call other iPhones?

Over the long term, closed systems either prove their worth, or become susceptible to competition. Even when the first option seems to occur, as in telephony, over a sufficiently long term, even it becomes an example of the second option.