Weekender: Sour Apple: Locked in the Walled Garden
Plus: Reddit Pops, All is Fair and Stability Rocked
It’s been a busy week for U.S. antitrust enforcers. Last Thursday (3/14), as discussed in our previous post, the Federal Trade Commission revealed that it has launched an investigation into Reddit’s data-licensing program for AI training. This Thursday, (3/20) the U.S. Justice Department got into the act, hitting Apple with a wide-ranging antitrust lawsuit targeting Apple’s entire walled-garden ecosystem.
The DOJ’s 88-page complaint accuses Apple of a “course of conduct” stretching over more than a decade designed to “maintain and entrench Apple’s smartphone monopoly at the expense of the users, developers, and other third parties who helped make the iPhone what it is today.”
Though centered on the iPhone, the complaint alleges Apple’s anticompetitive conduct “reverberates through the industries that are affected by these restrictions, including financial services, fitness, gaming, social media, news media, entertainment, and more.”
Unless stopped, the complaint says, Apple “will likely extend and entrench its iPhone monopoly to other markets and parts of the economy. For example, Apple is rapidly expanding its influence and growing its power in the automotive, content creation and entertainment, and financial services industries–and often by doing so in exclusionary ways that further reinforce and deepen the competitive moat around the iPhone.”
Antitrust experts seem initially to be divided on the strength of DOJ’s case. That’s beyond the scope of this page. One thing the complaint gets very right that is within scope, however, is its description of how Apple’s walled garden actually works, which it lays out in the very first paragraph:
In 2010, a top Apple executive emailed Apple’s then-CEO about an ad for the new Kindle e-reader. The ad began with a woman who was using her iPhone to buy and read books on the Kindle app. She then switches to an Android smartphone and continues to read her books using the same Kindle app. The executive wrote to Jobs: one “message that can’t be missed is that it is easy to switch from iPhone to Android. Not fun to watch” [sic]. Jobs was clear in his response: Apple would “force” developers to use its payment system to lock in both developers and users on its platform. Over many years, Apple has repeatedly responded to competitive threats like this one by making it harder or more expensive for its users and developers to leave than by making it more attractive for them to stay.
Walls are usually erected to keep what’s outside from getting inside. Apple’s trick is to erect walls keep its users from wandering out of its garden, and then use its exclusive access to them as leverage over anyone trying to reach them. Not only does that allow Apple to maintain high device prices (and margins), it allows them to extract “monopoly rents” from app developers and third-party service providers.
The complaint also correctly notes that the strategy did not begin with the iPhone. When Apple introduced the iPod in 2001, along with the iTunes application for managing users’ music collections and transferring MP3 files to the portable player, record companies loudly objected. The RIAA had already successfully sued over the first popular MP3 player, the Diamond Rio, effectively driving it from the market, and Apple’s “Rip, Mix, Burn” marketing campaign was the subject of congressional hearings and drew threats of lawsuits.
Two years later, however, the music industry was reeling from the impact of Napster and its like. Apple emerged as a white knight, launching the iTunes Music Store selling copy-protected tracks for 99 cents a piece. The record companies rushed to offer their libraries, granting licenses to Apple at 70 cents per track, and the iTunes Store quickly became the dominant MP3 retailer.
In what would become a pattern, however — the very pattern that DOJ is now targeting — Apple used a proprietary DRM for iTunes, which it declined to make available to other download stores. For its part, the iPod, like the early iPhone, had been designed to be compatible only with Apple’s DRM. The record companies only other route to Apple’s industry leading user base, then, was via DRM-free MP3 files.
When their initial licensing deals with Apple expired, and the labels sought to raise the per-track price, they found themselves trapped. iPod and iPhone users were captive to Apple’s DRM, with no easy way to switch to another MP3 store or move their collection to another device, while the labels were stuck on the other side of the wall. And Apple was the only way in.
Game, set and match.
ICYMI
Reddit Shares Pop
Investors mostly shrugged off any concerns over the FTC’s newly launched investigation into Reddit’s AI training-data licensing practices, to say nothing of the company’s unbroken 18-year record of net losses. The shares went out at $34 in Wednesday’s IPO, at the high end of the projected range, and popped to $47 on the first full day of trading, a 48% jump. Given that Reddit’s only source of revenue until this year has come from micro-margin digital advertising sales, investors’ enthusiasm can only be attributed to bullishness on the business of selling picks and shovels in the AI gold rush. Either that, or sheer folly.
Fairly Trained, Not Fairly Used
Fairly Trained, the ethical-AI certification startup launched by former StabilityAI executive Ed Newton-Rex, this week announced its first seal of approval for a Large Language Model. FT certified KL3M (pronounced “CLEM”), a legal resource LLM from 273 Ventures trained exclusively on a corpus of public domain and fully licensed works. Also earning FT certification this week was Voicemod, the first AI vocal speech and singing model to receive the Good Housekeeping seal. Fairly Trained also welcomed several new organization “supporters,” including The Authors Guild, SAG-AFTRA, Music Managers Forum - US, and the American Society for Collective Rights Licensing.
Unstable Diffusion?
Newton-Rex is not the only StabilityAI exec to leave the fold recently. Forbes reported this week that three of the consortium’s founding researchers, Robin Rombach, Andreas Blattmann, and Dominik Lorenz, all of Ludwig Maximilian University in Munich, have resigned. The three are credited with developing the core research underlying the Stable Diffusion image generator. Stability has experienced a steady exodus of top executives in recent months, including vice presidents Christian Cantrell (product), Scott Draves (engineering), Patrick Hebron (research and development) and Joe Penna (applied machine learning), all of whom left within the last year. Meanwhile, rival image generator Midjourney last week blocked all StabilityAI employees from accessing its site after being hit by a 24-hour outage Midjourney attributed to “botnet-like activity from paid accounts.” Midjourney blamed the incursion on Stability employees attempting to scrape the image-label pairs in the Midjourney training data. Dirty pool, that.
UPDATE: StabilityAI CEO Emad Mostaque announced his own resignation late Friday night (3/22) “to pursue decentralized AI.” He also stepped down from his position on the board of directors. Following the announcement, the board named two interim CEOs, COO Shan Shan Wong and CTO Christian Laforte. In a post on X/Twitter following his announcement, Mostaque said, “Not going to beat centralized AI with more centralized AI.”