Europe probes Apple's iPhone tactics as carriers seek to regain OTT control

Apple [AAPL] finds itself in trouble once again as European anti-trust investigators begin peering at its deals with carriers in order to find out if the company is using anti-competitive iPhone sales tactics.

Europe probes Apples carrier core

Poking and probing

Commissioners are investigating whether the company uses anti-competitive iPhone sales tactics and technical restrictions to force rival smartphone makers out of the European market. However, the probe doesn't constitute a formal investigation.

"The Commission has information indicating that Apple and Mobile Network Operators (MNOs) have concluded distribution agreements which may potentially lead to the foreclosure of other smartphone manufacturers from the markets," The Financial Times quoted from the EU questionnaire.

The investigation follows March reports that EU officials have begun digging into Apple's arrangements with carriers and was begin in response to private complaints from mobile operators.

"Generally, we are actively monitoring developments in this market," EC spokesperson Antoine Colombani said at a commission briefing on the matter in March. "We will, of course, intervene if there are indications of anti-competitive behavior to the detriment of consumers."

Naturally, the company that famously "pays every single Dollar" while maintaining complex financial arrangements to reduce its international tax burden denies any wrongdoing in its dealings with European telcos.

[ABOVE: Apple may sell millions of each new iteration iPhone, but this doesn't make it market dominant any more.]

But is Apple dominant?

In a sense this fresh EC investigation may not matter: in order to launch a formal probe European regulators would need to be able to prove Apple as the dominant firm in the EU smartphone market -- a position held since April 2012 by Samsung with its heavily-subsidized Galaxy range. Apple holds around 25 percent of the European market.

That latter point appears moot: after all, if Apple is being condemned for potentially locking others out of the market through its subsidy deals with carriers, then Samsung seems a likely candidate for similar investigation, particularly in light of previous investigations into its anti-competitive practices in Europe and its dominance of the smartphone market there.

Apple has another defense against the EC's concerns: its iPhone isn't available on every carrier but only on c.250 of around 800 networks worldwide. This means that, globally at least, it cannot be seen to dominate all sales channels.

As part of the investigation EC officials have despatched a nine-page questionnaire to several European networks as a preliminary attempt to establish if Apple is trying to force rivals out of the smartphone market.

The questionnaire explores claimed distribution deals that demand no other devices receive a heavier subsidy. It also questions if Apple demands a minimum number of iPhone sales as part of its carrier deals and the existence (or not) of technical restrictions that prevent the iPhone 5 being used on some European 4G networks.

The European iPhone 5 doesn't support every 4G/LTE network in use in Europe because it lack support for their spectrum bands (it doesn't support LTE over the 800MHz band, for example). However, the iPhone 5 also fails to run on an unapproved LTE network even in the event the hardware supports that network, previous reports have explained. LTE remains a slightly fragmented standard and most LTE-compatible hardware supports only a limited number of bandwidth types in order to minimise drain on battery life.

schiller_lte.jpg

[ABOVE: Phil Schiller introduces LTE iPhone, but not every band is covered.]

Limited by design?

"There are also indications that certain technical functions are disabled on certain Apple products in certain countries in the EU/EEA. If the existence of such behaviour were to be confirmed it might constitute an infringement of [antitrust law}," European Commissioners say, as reported by The Financial Times.

A Swisscom rep this year warned: "Apple only enables 4G access after testing their device on an operator's live network."

NorthStream CEO, Bengt Nordstrom, says Apple's policy shows "who is running the industry". "Apple have put themselves in the driving seat; it's really changing the game," he said.

Realistically, this is another facet of the battle for control between Apple and mobile carriers.

Apple succeeded in changing the relationship between device makers and carriers when it introduced the iPhone, as carriers at that time had been unsuccessful in promoting those smartphones that were available at that time. Carriers wanted to promote mobile data services in an attempt to compensate for declining voice revenues.

In agreeing terms with Apple carriers for the first time ceded control of hardware and software features to a device maker. That demand for control is part of why many current smartphones ship with a host of useless "bloatware" apps included within the device at the insistence of carriers, who are eager to extract more profit from OTT transactions.

Apple continues to forbid carriers from forcing such bloatware onto iPhones. That's great for consumers, but carriers are desperate to develop revenue streams from transactions that take place on their networks.

To my mind, the complaints regarding Apple's business practices in Europe constitute an attempt by carriers to whittle away at the company's power in order to foster a situation in which they can force Apple to cede a slice of OTT service profit -- potentially even including provision of network-specific app stores.

Apple is unlikely to cede to carrier demands -- at least not yet. Instead it will hope to change the conversation with record sales of the iPhone 6/iPhone 5S it expects to make available for sale in September.

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