The Cause and Effect of Tying the iPhone to a Unique Provider
Why should the American economy be concerned with this new development in technological tying What is tying and what are the effects of tying If such new tying is on the verge of being considered unlawful in Australia should it be unlawful in the states This paper will provide an explanation of tying in its various forms and how it affects the purchase and distribution of the Apple iPhone.
Tying can cause real issues economically. For the companies involved the results of tying could be positive by increasing their sales or detrimental. Sales can initially take flight but, later, if a product is popular, tying could even limit their growth or even the consumers opportunity to buy the product.
The purpose of this paper is to define tying and to explain and enlighten the reader to the economic effects tying of Apples iPhone to a particular service andor provider has on the companies involved and the effects tying has on the consumer. First, what is tying
Commerce (Tying)
Tying or product bundling occurs when a consumer purchases one product or good. Once the good is purchased another product is accessible to the buyer. This can be anti-competitive. Buyers may feel forced into buying a product that they do not want in order to gain access to a good they do desire. There are two main types of tying. The two main types of tying are horizontal tying and vertical tying.
Horizontal Tying
Horizontal tying defines the most standard form of tying. Horizontal tying is the practice of companies selling a particular product with an unrelated or unwanted good. A company can also use the method of horizontal tying for promotion. Instead of making the consumer purchase two unrelated products the company may instead provide the unrelated product free in an effort to sell an item. (D.C. Cir. 2001)
Vertical Tying
Vertical tying is used among most major electronics companies today. Vertical tying is where a customer who purchases an item must then use that item with other products andor services strictly from that same company.
Economic Affects
A good example of what is discussed in this paper on the economic affects of tying is noted in the article Limitation of Sales Warranties as an Alternative to Intellectual Property Rights an Empirical Analysis of iPhone Warranties Deterrent Impact on Consumers (2009)
Apples success with the Apple iPhone has brought with it certain problems. Its success has revealed a community of hackers that have attempted to circumvent the exclusive arrangement that Apple shares with ATT for cellular telephone service. Unfortunately for Apple (and similarly situated manufacturers), intellectual property doctrines and laws do not prevent consumers from altering their products so as to circumvent relationships that manufacturers may have with others. Manufacturers inevitably lose capacity to control the product as a result of the sale of specific units. Roark, M.L. (2009).
Consumers Issues
Horizontal tying and vertical tying is used for the Apple iPhone. First, when a consumer purchases the iPhone they soon realize that the capability offered of cellular service is restricted to one unique provider. Clapperton Corones (2007). This poses a problem to the buyer if they do not want or do not have the particular cellular provider. They must now purchase cellular service from the unique provider. The product and cellular service become a packaged deal or horizontal tying.
Vertical tying comes into effect when the consumer brings home the iPhone and realizes that the necessary features they want are not available unless the company has vertical tying with the Apple Company related to the iPhone. An example would be a particular game, music player or work program that the customer would like to use via their iPhone. If the program is not vertically tied with Apple then it makes it difficult for the consumer. This could be a reason for the buyer to decide not to purchase the iPhone.
Tying for consumers can be beneficial and pro-competitive if the bundled products provide financial savings for the buyer. Lower prices on bundled products benefit a customer. When tying becomes anti-competitive consumers are harmed (Clapperton Corones 2007, pg. 351).
In the past, tying was conducted through contract conditions and user or license agreements. The new form of tying mentioned previously involves the use of tying items together using technology. One example of this is the Digital Rights Management (DRM) technology. This technology restricts buyers from purchasing from all venders that they wish via electronic venues such as downloads of music and movies. This is true of Apples DRM system Fair-play. Apple product owner can only download and purchase music from Fair-play. (Clapperton Corones (2007), p.352)
Many customers who cannot or do not wish to use the products involved in tying use an illegal or frowned upon way to gain access to their own results. (Roark, M.L., 2009).
For Apple iPhone users tying or bundling of this in traditional and in technological ways sets several problems for them. First, the buyer can only use the unique provider that Apple has signed an agreement with. The buyer has limitations on the use of their product set by Apple. Now, the cellular service provider has their own terms and conditions that are set on the customer too. (Clapperton Corones (2007), p.354) In order to unlock the iPhone, the buyer needs to sign up with the cellular service provider for a minimum of two years. The technology used to lock the phone also blocks the buyer from several applications such as the iPod features. (Pgs. 354-355)
There are other requirements that need to be met such as the user must be at least eighteen years of age and allow the provider to complete a credit check. This is a potential problem to many buyers and could affect the results of a sale.
As noted above, many who could not or did not wish to use the cellular provider but wanted access to the software applications of the iPhone began to develop or use illegal or frowned upon ways to gain access to software programs. One example is of a seventeen year old named George Hotz. He was able to create a way of unlocking the iPhone for consumers (p. 357). Many other methods have been created to date. What does this mean for Apple, the companies tying with Apple and the unique provider
Apple and the Providers Issues
Many who cannot or do not wish to use the cellular provider manipulate Apples DRM system as a way to gain access to their software programs. This is something that Apple could fight and take to court. Instead, they have restructured heir DRM systems. One way they have done this is by updating their software programs. If an updated software program is uploaded to an illegally unlocked phone it will shut the phone down permanently (Clapperton Corones (2007), (p.357). Another way they have worked to correct this issue is in the contract and terms section of the warranty. Apple states that unlocking the phone in any other way than by set in the contract terms would void the phones warranty.
Although Apple is tied to the unique provider they have been extremely successful. Apple launched on June 29, 2007 and reported sales were over 270,000 in just two days. Apple went on to sell over 1,000,000,000 phones in the next seventy-four days. Apple receives payment for the iPhone regardless of whether the unique providers cellular service is gained. (Clapperton Corones (2007), (pgs. 355-356). With this knowledge, why would inappropriate unlocking concern Apple
According to the contract between Apple and the unique provider the provider must pay Apple 18.00 per every month of cellular phone service provided on each Apple iPhone. Financially, Apple makes more from the cellular service per year than the actual product (Clapperton Corones (2007), (p.355).
Typically, being tied exclusively to a provider hinders sales. Apples case is an exception to the rule but for how long The route Apple is taking with tying is controlled by technological locks and DRM systems that could potential harm the sale of the product in the long run. One example is the new promotion other cellular service providers have signed.
Several providers, rumors include Apples unique provider as a future contender, have contracted with Liberty International, a ten year, debt-free marketing company, in the effort to promote free lifetime cellular service that includes unlimited calls in the United states and Puerto Rico, unlimited e-mail, texting, internet and tethering, to any person who signs up and can refer three additional persons within thirty days. The promotion also advertises a phone that is very similar to the iPhone. (WOW Mobile)
This promotion poses many financial setbacks for Apple. First, if this promotion does well tying with multiple providers, what happens to the sale of the iPhone Will consumers opt to buy the touch screen phone offered with many of the same features held by the iPhone What happens to Apples 18.00 per month on cellular service if their unique provider is a part of a lifetime free cellular service program What happens to the customers that the unique provider currently holds (WOW Mobile)
Tying to Benefit Consumer and Market
An article written by Russell Pittman Tying without Exclusive Dealing (1985) explained tying in its simplest terms. He quoted Justice Frankfurter who said that tying was serving hardly any purpose beyond the suppression of competition, (Russell Pitman, 1985).
Although Apple and its unique provider are questionable in their use of market power, they have been financially successful giants in the technological world. At this point, the tying between Apple and the unique provider is within the law requirements. The law states that tying becomes illegal when The seller holds substantial market power in the tying good (2) the tying goods are fully distinguishable as separate products and (3) there is a substantial adverse effect in the market for the tied good. (Russell Pitman, (1985) Tying Without Exclusive Dealing p. 279)
Even with their success, Apples approach to tying is at a disadvantage to the average consumer who cannot meet the lengthy requirements of their tying rules. Most companies who take this anti-competitive approach do not maintain the success rate for long and realize they place many limitations on the customer and on themselves.
A better route to take would be to follow the advice of one economist,
rather than attempting to categorize the conduct (as in tying or not) or looking at cost standards, a better approach would be to ask why are you doing this what are the efficiencies are there other ways to achieve the efficiencies do you expect it to block competition (Justice Gov.)
The problem with tying is that, while it can work successfully, the company such as Apple, in the long run, will need to restructure their system in order to continuing making high sales. Is tying altogether wrong Not necessarily. When the above advice from the economist is followed companies can benefit themselves and the consumer.
A better option for consumers and sellers would be to follow the Liberty Internationals marketing plan. When dealing with tying, Liberty International combines products, service providers and bundles them in a cost effective plan that benefits the consumer. This gives Liberty International the marketing pull by offering free cell phone service if the buyer refers three additional customers. How do the cellular providers and Liberty International gain as well For a small or large fee (depending on the package the buyer accepts) can become a part of the marketing plan (as a dealer) making a percentage on each dealer package that they sell. The Providers gain a larger financial portion of the dealer package and the cellular service of those who do not refer three new customers.
Even with this incentive and the compilation of many providers working together, this form of tying will only be successful for a period of time but it, in the short term sense, is financially appeasing to both the consumer and supplier.
Tying grows and changes on a regular basis. If tying moves forward to better benefit both the consumer and supplier then the economy would flourish. More options and bundling with economically sound pricing would help increase purchasing among consumers thus increasing the sales of many suppliers.