Apple Inc. (Nasdaq: AAPL) yesterday (Thursday) supplanted Microsoft Corp. (Nasdaq: MSFT) as the largest technology company in the United States. Apple now trails only Exxon Mobil Corp. (NYSE: XOM) in size, but that size will only make the company a bigger target if it fails to use its newfound market position prudently.
Just last month, Microsoft's market capitalization exceeded Apples by some $25 billion. But Apple has finally overtaken one its great archrivals. But being the new standard bearer for the technology sector brings with it more than bragging rights. It also will make Apple a bigger target for its competitors and government scrutiny.
As far as competition is concerned, there's no question that Apple has outdone Microsoft.
The Mac, the iPod, iPhone and iPad have succeeded on a large scale – bringing new and innovative technology to the mainstream, while Windows, the Zune and Xbox have all struggled to dominate their respective arenas. Apple, with clever marketing strategies, has edged market share away from personal computer manufacturers, and the Zune can hardly hold a candle to the rampant success of the iPod. Microsoft's Xbox, meanwhile, is stuck fending off competition from Sony Corp.'s (NYSE ADR: SNE) Playstation 3 and the Nintendo Co. Ltd.'s (OTC: NTDOY) Wii.
What's more is that Apple's growing list of vanquished foes may soon find it convenient to band together against a common foe. After all, the company has amassed some powerful enemies. And with the likes of Google Inc. (Nasdaq: GOOG) entering the fray with its Gphone and accompanying Android operating system, Apple is fending off competition from every direction.
Additionally, Apple has found itself in the crosshairs of the U.S. government. The Department of Justice is reportedly looking into allegations that Apple used its dominant market position to dissuade record companies from giving exclusive music rights to Amazon.com Inc.'s (NYSE: AMZN) online MP3 store.
The antitrust inquiry is in the early stages, the New York Times reported, citing people familiar with the matter.
Billboard magazine reported in March that major music labels were giving Amazon the exclusive right to sell certain forthcoming songs for one day before they went on sale more widely. In exchange, Amazon promised to include those songs in a promotion called the "MP3 Daily Deal" on its Web site.
Amazon first launched the Daily Deal in June 2008 as a means of driving customers to its MP3 store.
"The labels paid nothing for being included in that privilege, nor were they asked," a major-label head of sales told Billboard.
But in mid-2009, the executive says, "that promotion morphed into something where the labels make arrangements to provide an exclusive selling window with Amazon for a big release expected to do a lot of business on street date."
"When that happened," the executive told the magazine, "iTunes said, 'Enough of that…'"
iTunes representatives reportedly urged labels to rethink their participation in the Amazon promotion and backed up those warnings by withdrawing marketing support for releases involved with the Amazon promotion
Apple has considerable leverage, as it is by far the largest seller of online music with 69% of the U.S. market, according to data from the NPD Group. That compares to Amazon's meager 8% share. Apple also is the largest over seller of music, with 26.7% of the total market, up from 12% in 2007.
"Without knowing what acts or practices they are targeting, it's difficult to say exactly how big a problem this is. Daniel L. Brown, an antitrust lawyer at Sheppard Mullin Richter & Hampton, told The Times. "But it's probably something Apple is already concerned about."
"Certainly if the Justice Department is getting involved, it raises the possibility of potential serious problems down the road for Apple," he said.
This isn't the first time Apple has been targeted by federal authorities, either. The Federal Trade Commission is moving ahead with a separate investigation into Apple's rules for developers who create applications for the iPhone operating system. That investigation is the result of a complaint from Adobe Systems Inc. (Nasdaq: ADBE), whose Flash media player was banned from Apple devices, along with flash-based mobile applications.
Adobe says Apple is stifling competition by barring developers from using Adobe's products to create applications for Apple's devices.
Apple Chief Executive Officer Steve Jobs in an open letter on his company's Web site countered that "the mobile era is about low power devices, touch interfaces and open web standards – all areas where Flash falls short."
"Perhaps Adobe should focus more on creating great HTML5 tools for the future, and less on criticizing Apple for leaving the past behind," Jobs added.
Still, Adobe insists that Apple's objections are about more than technological evolution.
"The story is bigger than HTML versus Flash. It's about freedom of choice on the Web," Adobe Chief Technology Officer Kevin Lynch said at the Web 2.0 Expo in San Francisco. "I don't think it's the role of the company to exercise judgment on what people should use, that's the role of society and the law."
"The technology issue Apple has with us is not that [Flash] doesn't work, it's that it does work," he added. "You can make a [Flash] application that works fine across OSes, and they don't like that."
If U.S. regulators agree that Apple is going too far, the company could find itself in a situation similar to that of the recently supplanted Microsoft, which has spent two decades battling regulatory scrutiny – one in which its dominance is blatant but its practices suspect.
"The contrast between the company's image today and when it first started is pretty dramatic," said Roger Kay, the Endpoint Technologies Associates analyst who two years ago in a BusinessWeek column warned that corporate hubris could spell Apple's eventual fall from grace. "They really did represent the hip outsider. But Apple's no longer the outsider – it's been elevated to the pinnacle. My thesis back then was that they were flying high and they should watch out, and they weren't even flying as high as they are now. So my timing may be off, but my thesis still holds."
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