Report: DOJ, FTC scuffle over scrutinizing Apple on antitrust

On a day when investors began celebrating Apple's report of having already sold its one millionth iPad, news from this morning's New York Post -- which was the first with the story of the Sirius + XM merger -- has thrown a cold towel on investors' sentiments. The Post cites a single anonymous source as saying that essentially the only thing stopping a government inquiry into whether Section 3.3.1 of Apple's Developers' Agreement violates antitrust law, is a dispute over which government department gets first crack: the Federal Trade Commission, or the Dept. of Justice Antitrust Division.

That's the section that limits the types of applications that iPhone developers can produce. According to the Post, the focus is on the mandate that developers write their apps originally and exclusively for iPhone OS, rather than port over an app that may appear somewhere else, like Android or Symbian.

In either case, an inquiry would be a preliminary step to determining whether a formal investigation is required. If both agencies are squabbling over which one gets precedent, the subject of their dispute quite probably involves a very different section, called "Section 5," not of the Developers' Agreement but rather the act that defines what the FTC does. It's a part of the law that suggests that the FTC has some authority over and above that of the Justice Dept., and the FTC brought the issue to a head last December when it pressed charges against Intel.

In the Intel case, the FTC commissioners invoked Section 5 of the FTC Act because, they said, they were afraid that the limits on damages that ordinary antitrust law presently affords might not be able to address some of the real, potential harm to consumers that the Sherman Antitrust Act fails to cover on its own. Specifically, the FTC was concerned that Sherman would focus on how Intel harmed its only true competitor in the CPU market, AMD, rather than how that activity in turn harmed competition as a whole, and consumers on a broad scale.

In his partial concurrence with the Commission's action last December (PDF available here), Commissioner J. Thomas Rosch explained why Section 5 would be relevant to the Intel case: "Intel has monopoly power in the CPU markets and near-monopoly power in the computer graphics product markets and, judging from the allegations in the complaint, the entry barriers surrounding these markets are remarkably high. Under those unique circumstances, the oft-repeated admonition that the Sherman and Clayton Acts protect competition, not competitors, and the federal courts' attendant disinclination to protect competitors in cases brought under those statutes, do not fit well. If the firm with monopoly or near-monopoly power (here, allegedly Intel) engages in an exclusionary and unjustifiable course of conduct that hurts its only competitor in the CPU markets (here, allegedly AMD) or its only two competitors in the computer graphics product markets (here, allegedly AMD and Nvidia), given the uncommonly high entry barriers, that exclusionary conduct harms competition too, by inhibiting those rivals from constraining the exercise of monopoly power."

Commissioner Rosch added that the weight of Intel's alleged exclusionary acts need to be considered as a whole, rather than individually -- as he implied a DOJ investigation would do -- because they were probably planned as a whole, and measurement of their impact on the market piece-by-piece may be impossible.

Given that history, it seems quite logical that the FTC and DOJ would be sparring over how to approach the case of Apple, for very similar reasons. The FTC may be concerned with whether the effects of Section 3.3.1 on the iPhone apps market should be investigated on a case-by-case basis (for instance, finding one developer who canceled a port-to-iPhone project), or whether instead Apple's maneuver should be investigated as one step in a broader plan to attain market presence by limiting competition overall.

On the other hand, Apple's position in the smartphone market is, in many ways, not comparable at all to Intel's presence in CPUs. Although the iPhone may be the single best-selling model in the US and other markets worldwide, Apple was actually the world's #3 smartphone supplier in 2009, with 16.2% worldwide market share, according to figures released last week by iSuppli. Nokia was the world's #1 with a 38.7% market share, with all its various models put together; RIM was #2 with 18.8%.

But the FTC's Section 5 does not necessarily pertain to monopoly, or near-monopoly, players. Rather, it gives the Commission the mandate to prohibit institutions (other than banks) "from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce."

What's more, the DOJ began preliminary inquiries into Apple's iPhone exclusivity contract with AT&T at about this time last year, with not much action as a result.

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