Tuesday, February 26, 2008

Why selling an iPhone to an Aussie might be illegal

A twist in Australian competition law means that Apple's iPhone might be illegal in its current form. Bundling a phone with a network contract is established practice, so what is it that Apple's doing wrong?

Australians still don't have a confirmed local release date for the iPhone, and there's also no official news on when the long-in-planning Apple Stores for Sydney and Melbourne will finally open. However, the notion that the two events might be linked together for maximum hype potential has been dealt a blow by two legal academics, who suggest that Apple's approach to network lock-in might be illegal in Australia, especially if it sells the phones through its own outlets.

An analysis of Australian competition law by Queensland University of Technology academics Dale Clapperton and Stephen Corones, published in the QUT Law And Justice Journal and recently reported by the AAP newswire, resulting in widespread global discussion, suggests that a little-considered aspect of Australian trade practices law could make it difficult for Apple itself to sell the iPhone down under.

Dedicated iPhone watchers are well aware that a critical aspect of Apple's business plan is signing up customers to a two-year contract with its chosen telco partner in each country. US iPhone users have to go with AT&T, UK users with O2, while German enthusiasts are stuck with T-Mobile and French iPhone addicts have to sign up with Orange.

If an iPhone isn't activated via the local carrier, it's effectively useless -- even non-phone functions like music playback won't work. And plugging in a SIM from a rival provider also renders the phone inoperable.

While software solutions to 'unlock' the iPhone abound, Apple is opposed to them to the extent of regularly updating the iPhone's firmware in a way that renders unlocked iPhones useless ... until the next software hack is released in a never-ending cat-and-mouse game. The official policy is that any unlock attempt voids the iPhone's warranty. The fact that Apple gets a chunk of each monthly payment, generally estimated at about $US18 per month in the States, is also doubtless a factor.

Apple has already run into competition law problems in Europe, where French regulations require it to offer a version of the phone that isn't tied to Orange. Apple's solution to that dilemma was to offer an unlocked version, but sell it for much more than the contracted phone -- 749 Euros for the 16GB version, for instance.

It's generally assumed that when the iPhone is released locally, Apple will form a similar exclusive alliance. It also seems logical that it will sell through both its own stores and the phone outlets associated with its telco partner. But that doesn't take into consideration whether Apple's approach is actually legal in Australia -- the issue Clapperton and Corones address.

The Aussie angle

The paper begins by noting that Apple is no stranger to what it calls 'tie-in' deals, pointing out that Apple's approach of tightly integrating the iPod with the iTunes store has also been controversial. However, in the case of the iPhone, the situation is different, it argues: "Apple Inc.'s marketing strategy for the iPhone in some foreign countries steps over a significant line -- it is no longer forcing the use of their own products and services, it is forcing the acquisition of services from entirely unrelated companies. This conduct may be per se unlawful in Australia."

The element which the paper largely concentrates on is the somewhat obscure notion of "third-line forcing": where you can only buy a product or service from one company if you also buy a separate service from another separate and unrelated company. If Apple was to sell iPhones itself through its stores but require the purchase of a telephone plan from an entirely separate company, that could constitute third-line forcing, since the iPhone is in practice useless without the separate mobile contract, and there's no choice about which provider you choose. While many countries treat third-line forcing as no different to any other form of anti-competitive practice (and would assess each case on its merits), in Australia the practice is deemed illegal in any form, effectively lowering the standard of proof.

At this point, a question might well be occurring to you: how is it that network operators like Telstra and Optus have managed to sell so many phones tied to a contract? The essential difference is that those purchases subsidise the cost of the phone in return for the contract -- something that isn't the case with the iPhone, especially when Apple's ongoing subsidy payments are taken into consideration. Those phones can also be unlocked early by paying out the contract, which hasn't been possible with the iPhone in any market where it's currently sold.

"Where the carrier has not subsidised the cost of the phone, there seems to be no legitimate pro-competitive justification for locking the phone to the services of that carrier, especially where that locking is permanent and not just for the duration of the initial contract," Clapperton and Corones argue.

What if Apple didn't sell the phones through its own stores, but used retailers associated with its partner phone company? (This is what has happened in France and Germany, where Apple stores are thin on the ground). This would seem to eliminate the element of two separate suppliers, since the iPhone is acquired from the same company selling the mobile service. However, Clapperton and Corones argue that even here, third-line forcing might be implied, because Apple's end-user licence agreement effectively creates a separate relationship with the company, and hence Apple can't claim it has nothing to do with those imposed conditions.

While other aspects of trade practices law which might be affected by the iPhone are discussed in the paper, the concept of third-line forcing seems the most relevant, and might help Australia play a leading role in dismantling such anti-competitive approaches. "Australia's competition laws may be uniquely suited to preventing this type of anti-competitive technological tying – because they prohibit third-line forcing per se, they greatly simplify the task of seeking redress for this behaviour through the courts," the authors write.

Apple, as usual, has nothing to say about its iPhone plans, potential legal roadblocks, or indeed anything much at all. But we wouldn't mind betting its lawyers have been taken away from other matters such as checking for patent infringements and scouring blogs for product information leaks to try and construct an argument that lets the iPhone go on sale in Australia without legal impediment.

[Source: http://www.apcmag.com/8310/why_selling_an_iphone_to_an_aussie_might_be_illegal]

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