Does Google Have A Looming Antitrust Problem?

I’ll start this with a confession: I have written and discarded about a half-dozen posts on Bitcoin, but none of them ever seemed “right”. But something else caught my eye in the mean time: a piece on Ars Technica trying to sensationalize an EU investigation into Google’s practices with Android as an “attack on open source”. I’m not sure that the author actually understands antitrust law, even in a casual sense, nor do they seem to know what comprises a predatory practice.

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Apple And Their Software

I was reading an intriguing article on eWeek that outlined some possible scenarios where Apple would licence Mac OS on other platforms. It is a timely question in light of the Apple v. Psystar ruling (here on Groklaw). There is one issue I have with the article, which is in the introduction, says Apple  “… might soon have the right to stop any and all companies that want to install its operating system in their own computers”. My issue is that the authors assume that a court of law was required to uphold Apple’s right to control how their copywritten work is used. All the court did was reaffirm a right Apple (and any other holder of a copyright) has in terms of how their works are used.

Apple has always had the right to control who runs their software, and what hardware they run it on. All software vendors do, with the exception of those ordered by a court to change those restrictions. When would that happen? In the case of an antitrust violation, and an order from the court is issued in order to limit the abuse of a monopoly. IBM consented to allow their mainframe operating systems to be installed on non-IBM hardware during the antitrust action they faced during the 1970’s. The courts in the US and the European Commission have both said that Microsoft cannot tie their browser into Windows and exclude other browsers. But these are exceptions for exceptional circumstances. Until these exceptions were made, nothing that IBM or Microsoft was doing was illegal in an of itself. In the case of IBM, where the problem occurred was IBM allegedly abusing its monopoly on the mainframe market to exclude competition. Note I said “allegedly”: the antitrust action was ended when IBM consented to conform to certain actions and behaviours, without admitting it broke any antitrust laws. Microsoft was found to be in breach of antitrust law in a US court, and agreed to make changes in how Windows was packaged and released to avoid a more drastic AT&T-like breakup.

Now, while it may be perfectly legal for Apple to restrict how their software is installed and used, that doesn’t mean it necessarily makes business sense to do so. The rest of the article goes on to explore some interesting scenarios, many of which are quite plausible in my mind, where Apple would look at allowing Mac OS on other machines. While their current model certainly has some benefits, I believe it is ultimately holding them back from capturing a larger portion of the PC market.

Controlling the hardware has some advantages for Apple. It keeps testing simpler, because they don’t have to deal with the plethora of 3rd party hardware (CPU’s, motherboards, video cards, storage, network, etc) that Microsoft does. As a result, it means they can spend more time making sure Mac OS works well with the hardware. It also allows Apple to control the entire experience for the user, not just in the software. Apple controls how that software works with the keyboard, pointing device, display, etc, and how the machine looks from the outside. Its a unified approach for both the hardware and the software.

If Apple were to licence Mac OS to other vendors, I would expect that the licence would include a lot of control for Apple in the look, feel and build quality for those systems. I don’t believe that Apple will let another company put out a machine that doesn’t look good, and “feel good” to the purchaser. That will limit the number of players that Apple will be able to deal with, but it could allow Apple to broaden their customer base and still have some control over the brand and image for the system.

The advantage for Apple is that it would allow Mac OS to be put on devices Apple wouldn’t necessarily want to build. One example is netbooks: buyers for those are very price sensitive, and Apple appears loathe to build a super-cheap machine and give up their historical profit margins. Apple, with the right licence, would still control the hardware design and appearance. It would allow Apple to capture some netbook customers, but without having to incur the expense (in dollars and brand image) they would have to take on by doing it themselves.

Apple CEO Steve Jobs has said that he does not want to see Mac OS on anything by Apple hardware. While Steve is passionate in his statements, he also said Apple wouldn’t get into home theatre systems (and subsequently did with the AppleTV). He also said Apple had no interest in smartphones (and shortly thereafter released the iPhone). I expect that, right now, Apple truly doesn’t want Mac OS on other machines. The profit margins are too good, and having the control has benefits. But, if things change (as outlined in the article), I would expect to see Apple do some kind of deal to put Mac OS on other machines.

Issues I See Around the Phoenix Coyotes

The Missing Topic

The ongoing saga of the Phoenix Coyotes bankruptcy, and Jim Balsillie’s attempt to force his way into the NHL, has been interesting, but the reporting and commentary has, to my mind, missed a key point: the difference between the team and the NHL franchise.

The Franchise And Who Owns It

There is a legal entity that owns a professional hockey team known as the Phoenix Coyotes. It has assets like player contracts, hockey equipment, office and computer equipment, and the other things needed to manage a team and play hockey. It has liabilities like arena and office lease agreements, salaries, taxes and such. It also has a franchise from the National Hockey League that gives it the right to call itself an NHL team, participate in the NHL schedule, be part of the NHL entry draft, get a share of revenue from television and merchandise, and receive a form of equalization payment made to support small-market teams. That franchise, however, is not legally the property of the Phoenix Coyotes, it is the property of the NHL. So, along with the rights I outlined, it also comes with restrictions: abiding by the NHL and NHLPA collective bargaining agreement, following the rules for transferring the franchise to another owner, where the team can play, what its regular season schedule looks like, and who it can source some equipment (like jerseys) from.

This franchise is not substantially different from a franchise for a fast-food restaurant such as McDonald’s. If you want to open a restaurant, and use McDonald’s menus, signs, food distribution network, etc, you pay them for a franchise. In this case, it is an upfront payment, plus annual payments based on revenue, with some set minimum per year. As part of the agreement, you are faced with restrictions: what can be on the menu, how the facilities look, and where they can be located. You cannot unilaterally move the restaurant to some other location, add items to the menu, change the look of the facility, or other similar actions without getting permission from McDonald’s first. McDonald’s retains the right to manage their brand and the network of restaurants that use it.

These same types of rules apply to NHL franchises. Jerry Moyes may own a corporation that operates a professional hockey team, but the right to play in the NHL resides with the NHL. Neither Moyes nor the judge has the authority to give that franchise to anyone else, because it isn’t theirs to give in the first place. The NHL has yet to play this card, and I suspect they are “holding back” on this topic, hoping for the issue to be resolved beforehand. However, I fully expect that the NHL will, if things start to go against them, decide to basically take back their franchise, and remove the Phoenix Coyotes from the NHL. Jim Balsillie is more than welcome to buy Jerry Moyes’s company (and with it the sticks, pucks, sweaters, desks, stationery, player contracts, etc). However, Moyes does not have the authority to sell the franchise, since it isn’t his to sell. The judge can’t just give the franchise to Balsillie, because it isn’t his to hand over either. It is no different than a leased computer: the computer company can, if they so choose, simply take back their asset and their claim against the company under bankruptcy is considered fulfilled.

The best the judge can do is negotiate with the NHL on a solution, because without the NHL franchise, the rest of the entity is of little value. The judge can order some things around unsecured creditors, service contracts and such, but even in that there are limits: he can’t order a contractor to do work and accept a rate that will cause them to lose money or damage their business. For secured lenders and assets owned by other organizations, the judge has to negotiate a deal, and the secured lenders can ultimately decide to liquidate, and owners of other assets (such as the NHL franchise) can simply take their asset back.

So Where Can This Go?

This could go a few different ways. The first is that the judge basically sells the team to Mr. Balsillie, order the NHL to give him the franchise and order them to move the team to Hamilton. I would expect an immediate appeal, lawsuits from the other 29 teams plus networks regarding damages they will incur as a result of the move, and a mess that will drag on for months or longer. The NHL may at this point decide to exercise their right to take their franchise back, and that will throw a wrench into the whole thing. There are variations on this (give the team and franchise to Balsillie, but order him not to move until the 2010-2011 season), but ultimately, it results in the NHL having to exercise their rights to manage their league and control their property, the franchise.

The alternative is that Balsillie loses, and decides to try to sue based on antitrust. This one will take a while, but Balsillie loses in the end, because the NHL does not hold a monopoly under US law. The question is the definition of what they hold a monopoly on. Do they hold a monopoly on professional hockey? Not a hope. There are other active pro hockey teams out there. Besides, legally that is too narrow a definition, akin to saying that Starbucks holds a monopoly on Starbucks. The NHL may be comprised of teams owned by independent businesses, but they act in concert as the NHL to compete with other sports leagues. The NHL competes with the NFL, NBA, MLB, NASCAR, IRL, MLS, F1, etc. for TV revenue and the dollars of sports fans. The NHL does not hold a monopoly on professional sports. Just as McDonald’s as the right to refuse anyone a franchise, so does the NHL. You can’t sue McDonald’s under antitrust, so why would someone be able to sue the NHL? Besides, there are case precedents from the 1970’s that say that professional sports leagues aren’t cartels (one of those gave us the concept of the unrestricted free agent), and that these leagues have the right to manage the league as a whole, even if the actions look like monopolistic behavior on the surface.

So, Ultimately…

At this time, the final outcome and when it happens is unclear. I don’t expect the Coyotes to be moving this season, just because the legal issues will postpone that outcome for a while. I’m not sure that Mr. Balsillie will end up with a team, because I believe that the NHL will prevail, and that the courts will uphold their right to manage their league (for better or worse) and the franchises in it.