Written by Swasti Mehta
The US Department of Justice (DOJ hereafter) along with 16 states has filed an antitrust lawsuit against Apple Inc. in the U.S. District Court for the District of New Jersey. The Plaintiffs claim that Apple has violated Section 2 of the Sherman Act which makes it unlawful to ‘monopolise or, attempt to monopolise’ any part of a trade or market. But before delving into the details of the lawsuit, we must consider the precedent.
Around 20 years ago, a company (let us call it Apple) felt that the market leader at that time (let us call it Microsoft), was playing unfairly. The Federal Trade Commission (FTC hereafter) got involved and launched an investigation to ascertain whether Microsoft’s ‘unfair’ conduct could be classified as anti-competitive behaviour (barred by Antitrust laws). When the FTC ceased the investigation, the DOJ stepped in and filed an antitrust lawsuit against Microsoft.
Microsoft was accused of creating hurdles in the installation of other software and web browsers like Netscape and Apple’s QuickTime on Windows computers. Microsoft advocated its noncoercive dominance - i.e. it was dominant because it was good. Ultimately, following an adverse ruling, the DOJ and Microsoft decided to settle.[1]
How Is This Relevant?
Well, cut to 2024, DOJ’s lawsuit is a bold ‘What goes around, comes around’ in Apple’s face. Apple has been called out for essentially the same thing that it complained about two decades ago when Microsoft did it – making it difficult for competitors to interact with and function within its ecosystem.
While the verdict is a few years away, Microsoft’s case provides some clues on the potential direction of the case. However, at the same time, the antitrust zeitgeist has changed (and could change again if Trump wins the November election). Both the US and the EU have witnessed a surge in antitrust lawsuits in the past few years – be it the probe against Microsoft’s relationship with Open AI, FTC’s antitrust lawsuit against Amazon, and most recently Justice Mehta’s ruling against Google LLC in the antitrust case alleging the search engine of illegally maintaining monopoly in the market.[2] We are yet to see if the decision is appealed, the company broken up or a settlement reached.
The EU has also enacted another proviso, a.k.a. EU Digital Markets Act (DMA hereafter), to launch probes against Big Tech. Apple celebrated the implementation of DMA by being the first company to face potential charges under it. This was followed by charges against Microsoft. In fact, the EU (post implementation of the DMA) is now the first legal jurisdiction with ex-ante antitrust measures!
Therefore, although relevant, the antitrust scene in the 1990s must be compared to antitrust cases in 2024 with some reticence and caution.
So, what exactly does the lawsuit say?
There are five main anticompetitive activities elucidated in the 88-paged complaint against Apple – blocking ‘super apps’; blocking competing cloud streaming services; reducing the quality of competing messaging apps; reducing the functionality of other smartwatches (if paired with an iPhone); and preventing tap-to-pay functionality of third-party digital wallets on Apple devices.
The lawsuit itself begins by painting the picture of the context of the 1990s – when Apple was close to bankruptcy. The ruling against Microsoft paved the way for Apple to gain some prominence by opening the market to its first few products - iTunes and iPod. Within the context of the decline in Microsoft’s market dominance, the iPhone debuted with the state-of-the-art squarish features we call ‘apps’.
Subsequently, the complaint turns to Apple’s ecosystem and attempts to incrementally prove its ‘stickiness.’ It alleges that Apple has an ulterior motive to make consumers so used to Apple devices that they stick to it themselves. DOJ claims that Apple has taken advantage of this ‘stickiness’ along with its control over software developers and service providers (by means of demanding 30% of the price of apps, thwarting purchases through alternate app stores/cheaper avenues etc.) to create a monopoly in the US market.[3]
The DOJ’s case revolves around the idea that Apple’s restricted interaction with third-party developers/service providers etc. is for the sole purpose of maintaining its monopoly:
“Apple therefore willingly sacrifices the short-term benefits it would gain from improved products and services developed by third parties when necessary to maintain its monopoly.”
The following are the main alleged ‘anti-competitive’ measures adopted by Apple –
· Apple has restrictive guidelines for third-party app creators and distributors. Apps can only be installed through the App Store (even if they are cheaper elsewhere) and the Company approves all subsequent updates. The lawsuit explains that Apple is merely able to sustain such strict guidelines due to its monopolistic nature.
“It makes no economic sense for Apple to sacrifice the profits it would earn from new features and functionality unless it has some other compensating reason to do so, such as protecting its monopoly profits.” (emphasis added)
But that appears to be more of an assumption. There is another probable reason – the fact that Apple’s utmost priority is the security and privacy of its users. However, it is difficult to understand the true severity of Apple’s market dominance without analysing the gamut of documents the DOJ is relying on.
· Apple makes users pay more money for its numerous services like iCloud and Apple Music. By doing so, the Tech Company increases its products’ stickiness and users’ cost of switching to another system since these services are exclusive to Apple’s ecosystem.
· Apple is making its product worse by slowing and seldom thwarting certain innovative Apps and updates. While this is a strong point because in a market, users sticking to a brand/product despite being aware of the associated problems, is an indication of a potential monopoly, but monopolies are not always artificially created and/or maintained (and natural monopolies are not barred by Section 2). Apple does stand between innovation and users on the proviso of upholding privacy and security standards, but such restrictions are solely on Apple’s own products and for a purpose other than impeding competition. In no way does it prevent innovation in the market and/or other products.
· One of the strongest allegations relates to Apple’s restrictions on Super Apps i.e., one app containing multiple mini programs. Super Apps make it easier to switch between devices; you can log into one app and access all the mini-programs within it. Currently switching from iOS to Android will require installing completely different Apps and low transferability. In simpler words, Super Apps reduce the relevance of the hardware because the App would operate similarly on an iPhone and a Samsung. Apple may again justify this by stating security concerns. Mini-programmes within Super Apps need to be developed simply to run in its configuration – thus evading Apple’s guidelines, restrictions and approvals.
· Apple has imposed restrictions upon Cloud streaming games. Cloud streaming games do not need expensive or particular hardware. Therefore, Apple’s conduct (a) makes the experience worse for its users; (b) disincentivises professionals from designing apps for iPhone (because separate iOS-specific versions need to be created in lieu of one cloud-based version); and (c) creates hurdles in shifting to another ecosystem due to a lack of cross-platform apps.
· Ancillary allegations relate to degraded experiences such as messaging between an iPhone and Android, reduced compatibility of non-Apple smartwatches with iPhone and restricted functionality of digital wallets’ tap-to-pay feature.
Apple’s Defenses
Apple is reportedly being represented by US law firm Kirkland & Ellis LLP and its likely defence can be derived from the letter written to Judge Neals requesting a pre-motion conference.[4]
Apple’s submission contends –
· That the complaint fails to establish the three provisos for admission of a Section 2 complaint i.e. monopoly in the relevant market, anticompetitive conduct, and anticompetitive effects. The technology giant faces “fierce competition” and the complaint does not produce any evidence showing anti-competitive pricing or the ability to control/restrict output in the smartphone market.
· That the SCOTUS’ position is clear that restrictions on third-party access to a platform do not fall within the purview of Section 2 of the Sherman Act. To support this stance, the letter cites Verizon Commc’ns Inc. v. L. Offs. Of Curtis V. Trinko, LLP[5] which ruled that businesses have the liberty to set the terms and conditions of their dealings, and this will not be prima facie a Section 2 violation.
· That the instant case is not comparable to U.S. v. Microsoft[6] because the latter held a 95% share of the relevant market (Apple holds about 70%). Moreover, Microsoft also attempted to control and restrict the relationship between third parties and its competitors through “exclusive dealing requirements”, unlike Apple which merely has guidelines on how third parties interact with its own system.
· That the Government has failed to define the proper market – Apple watches, smart wallets etc. all have separate markets and cannot be put under the umbrella of the U.S. smartphone market.
· That the SCOTUS has never found monopoly power below 75% market share which threshold has not been met by Apple.[7]
Apple’s claims appear to make sense on analyzing them in the context of the complaint. The following is an excerpt for illustration -
“185. Apple’s iPhone platform is protected by several additional barriers to entry and expansion, including strong network and scale effects and high switching costs and frictions. For example, if an iPhone user wants to buy an Android smartphone, they are likely to face significant financial, technological, and behavioral obstacles to switching.”[8] (emphasis added)
The ‘financial’ obstacle is probably getting cheaper alternatives and the ‘technological’ obstacle is shifting to devices with fewer third-party restrictions i.e. more apps, cloud gaming options, and greater compatibility with devices from different brands. This quagmirical stance leads to the third so-called ‘behavioural obstacle’ to switching. The DOJ is essentially alleging that Apple users do not want to switch because the alternatives are cheaper and offer greater options – and these are ‘obstacles’? Alternatively, it is alleging that the Apple ecosystem makes it difficult to switch to another. While this may be true, it is equally (if not more) difficult to move from a non-Apple to an Apple device – people still do it.
Viewed from Apple’s perspective, it is plausible that Apple’s “stickiness” is not a trap per se but a by-product of its superior ecosystem and the privacy and security it offers to its users which makes existing users stay and potential users inclined to switch to an iPhone. This is another one of Apple’s defences – the DOJ labels Apple’s very own distinctiveness (which requires restrictive terms and conditions) as anti-competitive and thus threatens its whole existence.[9] Injury to competitors due to aggressive competitive and innovative products is not anti-competitive.[10] It is not untrue that currently there are hardly any smartphone companies with an ecosystem to match Apple’s and promise the degree of privacy and security guaranteed by the Company.
My Tryst with Journalism
As an Apple user, I cannot imagine switching to any other ecosystem soon – even if there are cheaper and products in the market! This seemed highly intriguing, so I conducted a quick survey to check the consensus on this matter. Unsurprisingly, 67% of people were sure that they would not be willing to switch to a non-Apple device. In a separate survey on the same subject matter, when asked about the number of Apple devices people owned, 68% said two or more and only 2/18 individuals were willing to switch to non-Apple devices in the near future.
The most common reasoning provided included – camera quality, better interface, and Apple’s ecosystem. Some were willing to switch due to the expensive hardware and incompatibility with open-source apps. Those unwilling to switch were too familiarized with Apple to move to an Android (iOS stickiness?).
While this was a small sample group, the lawsuit highlights that Apple makes up 70% of the performance smartphone market in the US. This does not appear to be on track for a decline either since there are stats indicating that 88% of American teenagers expect to buy an iPhone next.
However, it must be kept in mind that antitrust standards differ among jurisdictions. For example – Epic Games is enjoying the benefits of the high scrutiny of ‘gatekeepers’ under the DMA in the EU which has forced Apple to allow installation of Fortnite through the Epic Games Store.[11] But, as previously mentioned, it has failed the majority of its complaint against Apple in the US. Additionally, EU laws have also coerced Apple to amend its restrictions on the tap-to-pay function on iOS devices.[12]
Interestingly, Apple repeatedly states that despite loosening restrictions it will maintain its privacy and security standards. Whether this is genuine or a façade to uphold restrictions is another moot point.
Conclusion
After considering the lawsuit in its entirety, it appears to lack solid claims. Put simply, the complaint highlights how Apple’s defining values and selling point (i.e., prioritizing privacy and security) can be seen from an antitrust perspective, instead of showing how it is per se monopolistic. Even in the Microsoft case, the Supreme Court had opined that businesses cannot be sued under antitrust law merely because the rivals are not effectively competing with them – the Court is clear on the position that antitrust laws "were enacted for 'the protection of competition, not competitors.”[13]
While the lawsuit shows how Apple users are somewhat stuck in its ecosystem (and my survey approves this theory), it does not explain why new consumers want to shift to Apple. These are no hidden facts that the lawsuit reveals. Consumers who opt for an iPhone, do so being cognizant of its restrictions and limitations. Thus, it will be veritably difficult for the DOJ to prove anticompetitive effects without which a Section 2 claim cannot be sustained.
Moreover, sans the vigour in the arguments put forth by the DOJ, there are various other factors to be considered – the outcome of the U.S. elections; the Microsoft judgement; the next steps in the Google LLC case and whether it is broken up; whether Apple’s latest feature, Apple Intelligence, loosens its existing restrictions etc. Therefore, only time can tell the conclusion of this case.
[1] Robert Freedman, Legal Dive, DOJ Faces Tough Road in Apple Antitrust Lawsuit, (22 March 2024).
[2] The Guardian, US Considers Breaking Up Google After Illegal Monopoly Ruling, Reports Say (15 August 2024).
[3] It must be noted that Epic Games has already challenged Apple’s conduct relating to App Store and 30% commission and lost recently. Interestingly, a similar lawsuit against Apple was won by Epic Games. CNBC, Here’s What Apple Had to Change as a Result of the Epic Games Legal Battle (16 January 2024).
[4] Stace Zaretsky, Above The Law, No. 1 Big Law Firm In the Country To Represent Apple In Government Antitrust Suit (25 March 2024).
[5] 540 u.s. 398, 408 (2004).
[6] 253 F.3d 34 (D.C. Cir. 2001).
[7] Letter to Honorable Julien X. Neals, United States of America et al. v. Apple Inc. (May 21, 2024).
[8] Complaint, United States of America et. al v. Apple Inc.
[9] Robert Freedman (n 1).
[10] Antitrust Division, Competition And Monopoly: Single-Firm Conduct Under Section 2 Of The Sherman Act: Chapter 1, p. 2.
[11] Michael Acton, Financial Times, ‘Fortnite’ Returns to iPhone and Android in EU after Antitrust Fight (16 August 2024).
[12] PYMNTS, Trending: Next Steps for Apple as It Opens its Ecosystem in Europe (12 July 2024); Javier Espinoza, Financial Times, Apple to Settle Tap-and-Go’ Payments Probe With EU (18 June 2024).
[13] Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc (1977).
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