Handshake at business meeting
“Keep your friends close, and your enemies closer,” Michael Corleone once said. But what happens when the line between friend and enemy is blurred, especially as relationships and competitive strategies evolve over time? It means that business leaders need to have a clear picture of how a collaboration will create value for both companies, and at the same time be wary of how things could change down the line in ways that could lead to business and regulatory risk.
Specifically, it is critical to think about what competitive options become available to you and your partner as a result of a collaboration. Let’s look at some examples.
Shortly after Apple released its iPhone in 2007, it offered app developers the opportunity to put their app up on the App Store, so long as the app met certain criteria. This created value for both Apple and the developers because Apple gained access to valuable apps, which encouraged consumer adoption of the iPhone, while the developers gained a large audience of potential users.
However, Apple is now being scrutinized (discussed in my last post) for how they treated these partners later. (Similar issues have arisen across Big Tech companies.)
In Apple’s case, app developers now claim that once Apple secured widespread adoption of its iPhones, it then decided to compete with these Apps with its own app offerings (either acquired or built). As a result, third party app developers were either cut off or given different treatment.
Apple disputes any disparate or inconsistent treatment of app developers. It also points out that the number of apps in the App Store has grown from 500 to more than 1.7 million, and that the App Store ecosystem created more than 1.9 million jobs over time. But the fact remains that independent app developers likely didn’t expect to later face competition by Apple when they entered into their alliance and built for iOS.
In another instance, Apple has claimed in the past that it was on the receiving end of bad partner treatment, in this case from Qualcomm. Apple and Qualcomm had agreed that Qualcomm would provide chipsets to Apple for its iPhone; Qualcomm benefitted from Apple’s scale, and Apple benefitted from the performance associated with Qualcomm’s chips.
However, Apple later argued that it was forced pay inflated patent royalties and enter into exclusive deals with Qualcomm after Qualcomm threatened to otherwise withhold necessary chipsets for phones. The Federal Trade Commission and Apple both brought lawsuits against Qualcomm based on these allegations.
Qualcomm disputed these allegations and prevailed in the litigation against the Federal Trade Commission. Apple settled its matter before trial, which suggests that both companies believed they continued to benefit from their relationship once certain terms were worked out.
In both of these examples, Apple’s partnerships provided value to both Apple and its partners because they both benefitted from the exponential growth of the iPhone. The key question became, like it so often does, what future strategy or position shifts may occur that could undermine the value of the arrangement.
Leadership Strategy Implications: Grow, rather than split, the pie.
Collaborations work best when they “grow the pie” with complementary offerings. This means that the partnership adds value to both companies, as well as to consumers, because together the partners fulfil a need that had not been met before – which ultimately increases consumer demand.
On the other hand, if a collaboration “splits the pie,” the companies in the partnership primarily focus on how to keep and split the benefits they captured for themselves, rather than create more value for consumers. For example, the “supreme evils” of competition law occur when competitors agree to fix prices or divide geographic territories. These agreements are automatically deemed illegal, because the companies arranged to keep their profits high by not competing, harming consumers in the process.
Take a simple collaboration between a movie theater chain and a specialty popcorn producer, in which the popcorn producer agrees to supply to the theater chain. The deal grows the pie if the specialty popcorn gives consumers a better movie-going experience, and as a result more people return to the movies post-pandemic.
However, let’s imagine that following the successful movie-popcorn collaboration, the theater chain creates its own specialty popcorn brand (which they prefer to sell since they don’t have to pay a margin to the popcorn maker). Alternatively, let’s say the popcorn maker started to promote the latest Netflix streaming releases on its packaging, essentially encouraging patrons to stay at home and enjoy the popcorn instead.
In either scenario, the theater chain and the popcorn maker may be concerned: in the former scenario, the popcorn maker will have to deal with beating a new competitor, and in the latter, the theater chain may worry that ticket sales will go down in lieu of at-home streaming. This isn’t a problem yet, to be clear – in fact the better popcorn or better movie-going experience that may result is theoretically good for consumers.
But let’s say that the concerned parties then agree to split the pie — for instance, they agree that the theater won't make its popcorn anymore or that the popcorn producer will stop promoting new Netflix offerings. Now, consumers could suffer because they are losing out on popcorn choices, or have less information about new streaming options. To minimize the risk of legal scrutiny, it is better to work out in advance how a collaboration might maximize the growth of the pie — even accounting for future initiatives.
In March 2020 the Department of Justice Antitrust Division issued a warning that anticompetitive collaborations between competitors for products in high demand due to COVID-19 would be prosecuted. Around the same time, the DOJ and FTC confirmed that publicly beneficial arrangements, such as health care facilities working together to provide resources and services to communities without immediate access to PPE, would be permitted.
So where is the line? Collaborations between competitors carry more regulatory risk, and would need to be justified by growing the pie significantly, whereas collaborations between complements will raise fewer issues.
For instance, if competing movie theaters got together for an initiative to promote drive-in shows during the pandemic, that grows the pie by raising awareness of entertainment options consumers could safely enjoy. This would likely survive scrutiny as long as the theaters did not agree to proposed pricing or exchange competitively sensitive information that splits the pie.
To be sure, some splitting of the pie is often necessary to achieve the overall benefits of the arrangement. But critically, for both good business and good compliance, a successful collaboration is one that creates more value than it divides, and any restrictions built into the agreement need to be necessary and tailored to the overall goal.
Collaborations are often needed not just to survive, but to thrive in today’s ever-evolving landscape. As a leader, though, you’ll just want to make sure that you, your collaborator and consumers all agree that it has been successful.
