Apple's Growing eReader Monopoly

Alexander Moschina
by Alexander Moschina, Managing Editor, Investment U

Apple's Growing eReader Monopoly

by Alexander Moschina, Investment U Research

Wednesday, May 18, 2011

For independent sellers, competing with the likes of (Nasdaq: AMZN) and Barnes & Noble (NYSE: BKS) in the e-book market was already difficult.

But now Apple (Nasdaq: AAPL) is making it even harder...

The company recently changed its app policy so that e-book sellers must now hand over a 30 percent cut of all sales made on Apple devices.

And while that's guaranteed to sting even the big players (both Amazon and B&N have eReader apps on the iPad and iPhone), the real victims here are the little guys.

Like this Irvine, CA start-up...

Apple Puts BeamItDown Out of Business After Just Six Months

Launched in December, the iFlowReader by BeamItDown Software emerged as a promising alternative to even the most popular eReader apps. Unlike competitors, it displayed book text as a continuous ribbon rather than standard pages. This made the eReader simpler to use, said the company.

Of course, whether it would have caught on with consumers or not, we may never know. Because according to a note posted by BeamItDown on May 11, operations will shut down at the end of the month.

"We submitted our new iFlowReader app to Apple in November of 2010 and they approved it... Two months later, Apple changed the rules and put us out of business," the note said. "We put our faith in Apple and they screwed us."

The company's planning and development over the past two years was based on Apple's operating system. And it's far too late in the game to switch over to Google's (Nasdaq: GOOG) Android platform. So there's no way to save the iFlowReader.

But it's not the first casualty of Apple's policy change...

Sony's App Blocked By the Apple Store

On February 1, an eReader app by Sony (NYSE: SNE) was rejected because it directed users to the company's website at the point of purchase (this would have allowed Sony to avoid paying Apple's 30 percent fee).

In response, Sony released the following statement: "With little notice, Apple changed the way it enforces its rules and this will prevent the current version of the Reader for iPhone from being available in the App Store."

Still, there's nothing illegal about what Apple is doing. In fact, from a shareholder's perspective, it's great that the company gets a cut of transactions made on its devices.

Plus, according to James McQuivey of Forrester Research, the average Apple user won't even realize what's going on. They're more likely to blame the seller - like Amazon - for the fact that they can't buy e-books on their iPad.

But the good times for Apple won't last forever. The FTC will likely step in, says McQuivey. "Any company that has either a natural or contrived monopoly eventually comes under scrutiny for how it inhibits competition and innovation."

That's a fine line Apple likes to walk. Just last year it was investigated for telling developers they can't use Adobe's (Nasdaq: ADBE) software to design apps. And in the end, it was Adobe who caved and created a converter tool for developers.

Because the iPad and iPhone are the two hottest mobile products on the market. Apple sold a combined 23 million devices in the recent quarter alone. If anyone wants to reach those consumers, they're just going to have to play by the company's rules... at least for now.

Good investing,

Alexander Moschina

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