Apple in Australia: Consecrating competition law or a case for cooperation?

Last month, the Australian Competition and Consumer Commission (ACCC) began legal proceedings against Apple for alleged breaches of Australian consumer protection law. Papers were filed just days after the same authority delivered its final determination preventing Australia’s “Big Four” trading banks from collaborating to negotiate a single agreement with Apple for the introduction of Apple Pay into Australia. The two cases pose some interesting questions about the role of collective action in addressing the market power of global firms such as Apple in comparatively small markets such as Australia.  Australia’s total population is just 24.5 million — compared to the US population of 326 million and more than over a billion Apple devices reputed to be in use worldwide. Despite Apple’s iOS operating system having less than a 20 percent share of the global smartphone market compared to the Android behemoth’s 80 percent, Apple’s share of the Australian market currently sits above 40 percent, the closest it has been to Android since 2014. Left to their own devices, Australian consumers would appear to have comparatively little bargaining power against Apple. This appears to support the collective action undertaken by the ACCC in bringing its legal action against Apple, but on the other hand, the same ACCC appears unwilling to allow collective commercial bargaining by the banks — arguably serving the same end consumers — to counter other instances of Apple’s potential exertion of market power. Does the ACCC have the balance right between collective government action to protect consumers and collective action by private parties?

Consumer protection or collective involuntary contract renegotiation?

At the core of the pending court case is the infamous "Error 53," which disabled some consumers' iPads or iPhones after downloading an update to Apple’s iOS operating system. Many consumers who experienced Error 53 had previously had their devices repaired by third parties not approved by Apple. Under Australian consumer protection law, consumer guarantee rights exist independent of any manufacturer’s warranty. Hence, Apple’s refusal to reinstate the iPhones repaired by nonapproved firms — even if the repair was not related to ‘Error 53’ — is alleged to be an infringement of consumer protection law. That iPhone consumers knowingly agreed to the warranty terms when purchasing the phones, although some of them then chose to commission nonapproved repairs (given that they could have purchased an Android phone if they found these terms oppressive), is not a sufficient defense for Apple, according to ACCC Chairman Rod Sims. Sims claims that: "denying a consumer their consumer guarantee rights simply because they had chosen a third party repairer not only impacts those consumers but can dissuade other customers from making informed choices about their repair options including where they may be offered at the lower cost than the manufacturer." The ACCC’s action coincidentally promotes competition in the Australian market for phone repairs — not a trivial concern given Apple’s large share of the phone market. But in the long run, it reduces competition and consumer choice rather than enhancing them. The government’s warranty terms will become the only terms effectively enforced, and even if there had been some additional benefit for consumers in Apple’s more restrictive contract terms, at least some consumers were prepared to pay a premium when getting repairs done. Furthermore, it likely reduces the incentives for consumers to invest in understanding the terms to which they are agreeing. Why bother being an informed consumer in the first place, if enforcement of legislative provisions voids the terms to which you have agreed? Arguably, this opens the door to higher levels of harm occurring because unfair terms would be less likely to be identified and discouraged preemptively. However, in this case, the ACCC can afford to “have its cake and eat it too” because it can free ride off the efficacy of Apple’s contract terms being tested commercially in other jurisdictions, such as the US, where different approaches to consumer protection and the sanctity of contracts freely agreed on prevail.

You can bank on it

In contrast to the potential enforcement of a single legislated warranty in the phone market, the ACCC has denied Australia’s banks the opportunity to negotiate a single agreement for the introduction of a new technology — Apple Pay — into the Australian market. The matter is complex, because it involves technical standards that require a degree of agreement and contractual arrangements — which can benefit from variety and network effects — which benefit from rapid, large-scale adoption. But whether the ACCC likes it or not, Apple’s global scale affords it substantially more bargaining power than any single Australian firm (and the trading banks are among the biggest) can muster. While a small government can use its sovereign powers (e.g., legislation) to hold powerful firms to account (for good or bad, as illustrated above), individual firms have fewer resources available to them during commercial negotiations. The powerful firm can offer "take it or leave it" deals that disproportionately allocate it the gains from interacting. Requiring all the banks to negotiate separately guarantees they all face the same large disadvantages. It also increases both the transaction costs and the time taken to bring Apple Pay to the Australian market and slows down the rate at which network effects will accrue. If Apple Pay does offer real benefits to consumers, then an earlier introduction is unequivocally better than a later one. Allowing the banks to cooperate over negotiating the terms redresses some of (but does not totally eliminate) the market power imbalance and reduces the likelihood of all the gains accruing to Apple. However, it also apparently reduces the potential for competition between the banks in the terms they offer Apple Pay to consumers. But does it help consumers? Multiple negotiations increase Apple’s costs, arguably making it more likely that it will use its market power to impose the same “take-it-or-leave-it” deal — likely less beneficial than the one that could be negotiated collectively — to all banks individually. Consumers may have a choice of terms between banks, but at higher cost to the Australian economy, both in lost share from negotiation and delays in bringing a new technology to market. The jury is out as to whether the ACCC has got the balance between cooperation and competition correct in these cases.

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