Apple, AT&T and Antitrust

In California, a federal judge has ruled that an antitrust class action suit can proceed against Apple and AT&T. What have those companies done to warrant being hauled into court? Basically, they agreed to sell only “locked” iPhones. A locked phone is one that works only on a specific mobile network — in this case, AT&T’s network.

So, let’s get this straight. Both Apple and AT&T want to make money. Apple makes money by creating cool mobile devices like the iPhone — creating, as in designing and manufacturing phones that didn’t exist before Apple’s brilliant designers and engineers thought of them. AT&T makes money by creating a mobile phone network–creating, as in erecting a complex array of electronic equipment capable of transmitting messages from handheld phones, a network that didn’t exist before AT&T created it.

Then Apple and AT&T decide to make money by working together. Although details of their deal aren’t public, it’s clear that AT&T saw an opportunity to increase its subscriber base by becoming the only retailer of iPhones. Apple, for its part, looked forward to receiving payments from AT&T based on a percentage of every iPhone subscriber’s monthly bill. Was this collaboration a good idea? You be the judge: consumers have bought 50 million iPhones in three years.

Let’s pause at this point to remind ourselves that the Apple-AT&T agreement does not interfere with anyone else’s smartphones or networks. The makers of Blackberry or Palm phones can choose to sell phones locked or unlocked. Networks such as Verizon and Sprint can choose whether to enter into exclusive contracts as AT&T did with Apple. In short, every other firm in the industry is free to make as much money as they can competing with Apple and AT&T.

So far, does this sound like conduct that should be illegal? Let’s look at what the plaintiffs are complaining about. According to reports, their lawsuit charges that the locked phone agreement “hurt competition and drove up prices for consumers.”

“Hurt competition?” This is competition. Apple and AT&T are competing with other makers of smartphones and with other mobile networks — and those other makers and networks are competing right back. In a free market, everyone else in the universe is at liberty to enter the market and offer a product that is better, cheaper, or both. No competitor can forcibly prevent another’s efforts.

“Drove up prices for consumers?” There was no price for an iPhone before Apple created and sold it. There was no price for an AT&T iPhone subscription until AT&T offered it. Those prices were not “driven up” from some arbitrary level that the plaintiffs would have wished to see. The prices were set by the owners of the goods and services being sold. Consumers were free to buy or to wait for some competitor to offer an equally attractive, unlocked phone.

As this suit progresses, observers should look closely at what conduct is illegal under this nation’s antitrust laws, and whether it should remain so.

This story first appeared on Voices for Reason, July 14, 2010.