Regulatory, Anti-Trust and Disruptive Risks Threaten Apple's Empire

It’s true; Apple looks about as well-positioned for an uncertain future as any company could be. Still, plenty of risks exist that threaten Apple’s high-tech hegemony.

This article was originally published in Forbes

In last week’s column (“Bye Bye BlackBerry. How Long Will Apple Last?”), I discussed the precipitous decline of Research In Motion’s BlackBerry, a device that held “must-have” status just five years ago but is now scrambling for its very survival. The moral of the story: In today’s dynamic, rapidly evolving information marketplace, no tech titan stays on the top of the hill very long—not AOL, not Microsoft, not MySpace, not BlackBerry, and not even Apple.

It was that last quip I made about Apple in my previous essay that got some people fired up. Some commenters here and elsewhere insisted that, compared to those earlier tech titans, Apple is still innovating rapidly, that it has a very different business philosophy, and that it has record levels of cash in the bank.

It’s true; Apple looks about as well-positioned for an uncertain future as any company could be. Still, plenty of risks exist that threaten Apple’s high-tech hegemony.

When industry analysts think about the future of the sectors and companies they cover, regulatory risk is one of the most important considerations they factor into their models. Consider a few of the regulatory risks that Apple already faces today that could trip the firm up in coming months and years:

  • Factory conditions: Whether deserved or not, Apple has become the new whipping boy in the debate over worker conditions in overseas markets. Whether Apple adjusts production practices voluntarily or under threat of regulation is irrelevant; it will change their cost structure, affect delivery timetables, and could result in higher prices for its products, like the iPhone and iPad.
  • Antitrust: Apple’s current success has been attracting attention not merely from analysts and investors but also from antitrust officials both here and abroad. U.S. Department of Justice and European Commission antitrust officials are both currently investigating Apple and book sellers for supposedly anti-competitive practices in the e-book market. Even if Apple beats back that investigation,broader questions are being raised about the company’s power that could invite a much broader investigation. The danger for Apple is that antitrust becomes an omnipresent threat that must be factored into all ongoing business decisions. Antitrust is a particular danger to Apple because the firm is highly vertically integrated and that integration is the source of many of their innovations.  As earlier tech titans like IBM and Microsoft learned, when antitrust hangs like the Sword of Damocles, every decision about how to evolve and innovate becomes a calculated gamble.
  • Spectrum: Apple’s business model depends heavily on a healthy wireless ecosystem that is nurtured by a constantly growing supply of spectrum capacity. Today’s wireless providers are doing their best to keep up with the explosive data demands that Apple, Google, Microsoft, BlackBerry, and other providers have placed on them. Yet, federal spectrum policies continue to artificially limitboth the flexibility of existing spectrum and the availability of new supply. Even if Apple chose to directly invest in spectrum capacity—either through acquisition of existing suppliers or new, independent ventures—it would not alleviate this risk to its long-term growth. Such a move would also open the firm to different regulatory risks since the Federal Communications Commission would suddenly have more leverage over them.
  • Privacy: As I’ve noted here several times before, privacy regulation is percolating on both sides of the Atlantic. New rules could limit the sort of data collection practices that power online and mobile services. In fact, Apple hasalready come under scrutiny for retaining locational information on devices, even though there really wasn’t really any harm in it. Apple’s only consolation here is that, if heavy-handed privacy regulations are handed down from Washington, the new rules would probably burden everyone equally.
  • Patents: Apple has been aggressively defending its own patents but other firms have fought back—including Kodak, HTC, Nokia, Motorola, and Samsung—and the smartphone and tablet patent wars are now raging. The Financial Timesnotes that this “conflict has turned into a vast legal quagmire” with almost everyone suing or being sued. But no major firm is being sued more than Apple. Even if Apple somehow prevails in most of these cases, the litigation costs alonethreaten to become a major risk to the firm and its ability to quickly innovate.

Chart: Smartphone Competitor Patent Suits

It’s entirely possible that Apple will be able to deftly navigate its way around each of these regulatory storms. After all, they have record levels of cash on hand to hire armies of lawyers and lobbyists to help them steer clear of trouble.

But that still leaves the biggest risk of all: the disruptive technologies that could emerge from unexpected corners. In other words, just as BlackBerry and Palm didn’t see Apple coming, the same sort of unexpected risk exists for Apple. Moreover, if Apple is forced to spend an increasing percentage of its time making regulators happy, that’s the sort of innovation-sapping distraction that could open the door for rivals to come in and undercut them.

Let’s be clear: no one—least of all me—is suggesting investors dump their Apple stock any time soon. Apple remains one of the great capitalist success stories of our time; a company that will likely remain on the cutting-edge of innovation for many years to come.

But the good times won’t last forever for Apple, especially if these regulatory risks continue to pile up.