Why the Apple Antitrust Suit Matters
Apple just got slapped with a major antitrust suit alleging a 'pattern of anti-competitive behavior' across all its product lines. And it lost $114 billion in market cap in one day as a result.
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Today, the Department of Justice and 16 states led by officials from both political parties filed an antitrust case against Apple, the fourth trillion dollar firm targeted by the Biden administration with an antitrust suit for unfair monopolistic behavior.
This suit is a big deal in and of itself, but it also matters beyond just Big Tech. But it’s also a bit unusual, because while Google, Amazon, and Meta have their villain-esque side, Apple is beloved, with some of the strongest branding in the world, and it spends billions on its iconic ‘Think Different’ imagery. Its smartphones are user-friendly and often seamless, and its CEO Tim Cook talks up the firm’s commitments to privacy and consumer protection.
Beyond that, it seems like there’s competition, since Android phones are available. Few iPhone customers actually switch, but the point is, theoretically they can. At the very least, it seems like an odd priority to take on a corporation that people like and that makes good products, when there are so many other problems.
So what’s the point of the case? On a broad level, the short story is that Apple used to be wondrous. But monopoly power, as it turns out, has poisoned the firm. Once a great innovator, Apple has decayed, moving away from its roots as a competitive technology firm, and spending its resources making it harder and harder for consumers and businesses to get out of the Apple ecosystem, and then trying to extend that ecosystem from smartphones into cars, business software, and banks. Apple has become a dangerous corporation, with designs on imposing an authoritarian vision over as much of the economy as it can get away with.
In other words, the broad allegation is about how power corrupts. The complaint may be about technology, but the story here is as old as time. Let’s dive in.
It’s Not Just Apple
One of the interesting questions is why Big Tech is in the cross-hairs of antitrust, as opposed to more standard industries like food, medicine, farming, or banks. One answer is that Big Tech firms are the pace-setters of commerce, so what they do, or are not allowed to do, influences every non-tech CEO. But a different answer is that those more standard industries are in the cross-hairs of antitrust. In fact, the suit against Apple must be understood as a mere part of a revolution in policymaking. And oddly enough, that revolution starts with a body most of us disdain. Congress.
In October of 2020, Democratic Congressmen David Cicilline and Republican Congressman Ken Buck released a blockbuster Antitrust Subcommittee report detailing the unfair monopolistic practices of four giant trillion dollar firms: Apple, Facebook, Amazon, and Google. The report was the culmination of a 16 month investigation in which investigators examined millions of documents, interviewed hundreds of business leaders in the industry, and put Big Tech CEOs on the witness stand. These hearings and reports generated headlines all over the world, and showed, in detail, that Big Tech firms weren’t big because they were great, they were big because they thwarted rivals through specific business practices.
What kind of impact did that report have? Well, from 1998 until that report in 2020, the Department of Justice didn’t file a single monopolization claim against anyone, and certainly not against any powerful firm. Since the release of that report, enforcers in government filed major antitrust suits against Facebook, Amazon, Google, and now Apple. The line from the report to the current multi-trillion dollar assault is direct; one of the key investigators on the Antitrust Subcommittee staff was a young researcher named Lina Khan. And outside of government, private plaintiffs have filed cases as well, with Google for the first time declared an unlawful monopolist in its suit against Epic Games.
The flurry of activity in the competition policy world is hardly isolated to Big Tech. Spurred by the Big Tech report and the energy it helped generate, the government has investigations or suits on meat prices, rent, drugs, epipens, ticketing, airlines, homebuying and supermarkets. Moreover, private litigants, often with support from government, are trying to reorder other areas of the economy, such as the change in commission structures announced by the realtors earlier this week.
Yesterday another inhaler maker slashed prices to $35 out of pocket in response to FTC pressure. Today, aside from the Apple case, bank regulators tightened merger rules on banks above $100 billion in size, the Department of Transportation started an investigation on airline’s use of data to manipulate or price-gouge consumers (with support from Senator Ron Wyden), and the government came out with the results of a major investigation on how big retailers, distributors, and food processors squeezed small businesses and consumers during the pandemic.
All of that is a way of saying that to look at the Apple suit in isolation and ask, as many are, why go after the iPhone, which most people like, instead of addressing more important things, is to miss the bigger picture. Enforcers are dealing with food, medicine, housing, and travel. But they are also going after the titans of industry, which includes Apple. And the suit explains why.
Middleware Out Economics
To understand the importance of the Apple antitrust suit, it helps to start with the location of Tim Cook on the day of the announcement. On a day where the Federal government announces it wants to fundamentally reorganize your business, most CEOs would be at headquarters, figuring out how to push back, do media, talk to big shareholders or confer with legal. But Apple CEO Tim Cook was doing none of these. He was in Shanghai, where Apple makes most of its phones, trying to both shore up his relationships with the Chinese leadership, and deal with collapsing sales of the iPhone in China.
Why is Cook in China on such a big day? The answer is that in China, unlike any other market he has to deal with, Apple must actually compete for market share. You see, the market for smartphones is largely a market for replacements, because only 10% of buyers each year are buying their first smartphone.
And in the U.S., retention rates are really high. According to one mobile carrier, 98% of iPhone owners buy a new iPhone. In China however, that number, at least a few years ago, was just 50%. The reason is simple. In America, it’s difficult to move out of the Apple ecosystem. In China, it’s easy.
And one reason is because in China there are what’s called ‘super apps’ like WeChat or Alipay. As Ben Thompson noted, WeChat has a lot of different functions, such as “communicating, reading news, hailing taxis, paying for lunch, accessing government resources, for business,” and so forth. If you switch from Apple to a different phone, you can just download your super apps, and voila, you’ve switched. Thus the underlying hardware is commodified; competition on smartphones happens via price and features, and it’s aggressive.
In the United States and the rest of the world, there are no super apps. Why? Because Apple, through its control of app stores, has banned them. It doesn’t allow rival app stores, and it doesn’t allow super apps to be sold through its own app store. According to the complaint, “as one Apple manager put it, allowing super apps to become ‘the main gateway where people play games, book a car, make payments, etc.’ would ‘let the barbarians in at the gate.’ Why? Because when a super app offers popular mini programs, ‘iOS stickiness goes down.’”
Apple’s own materials revealed in the complaint make the point even clearer. In one presentation to the board of directors, Apple highlighted the “[u]ndifferentiated user experience on [a] super platform” as a “major headwind” to growing iPhone sales in countries with popular super apps due to the “[l]ow stickiness” and “[l]ow switching cost.” It’s all about the switching costs.
Now to be clear, super apps aren’t good or bad, and they are only one mechanism to lock people into the Apple ecosystem. The point is, in China people have a choice of whether to use super apps, whereas in the U.S. we have to lock everything into the operating system of the smartphone we use.
The result is that Apple has monopoly power over not just how much we pay for smartphones, but over virtually every use of our smartphone and by extension everything that smartphone comes to touch, whether that’s business software applications, digital wallets, cars, or games. In China, Apple has to compete on price and quality, because switching to different phones is easy. In the U.S., Apple sets the price, because switching is hard. The complaint by the Antitrust Division lays out the tactics Apple uses to do so.
Aside from disallowing super apps, Apple also has degraded, through contract and design choices, a whole host of rival products that make it easy to switch iPhones, such as non-Apple web browsers, services that make it easy to play games without expensive hardware, tap and pay features for non-Apple wallets, cross-platform messaging apps, and third party smartwatches.
The most well-known example is Apple’s sabotage of Android and the infamous ‘green bubble’ problem. If you use an Android phone and send a text to an iPhone, your message appears in a green bubble and doesn’t send high quality video or allow emojis, because Apple won’t allow Android phones to use its richer and more secure system for sending messages. Apple even has attempted to destroy messaging firms like Beeper that try to innovate and create cross-messaging compatibility.
The reason, again, is to raise switching costs. In 2013, an Apple executive explained that supporting compatible messaging “would simply serve to remove [an] obstacle to iPhone families giving their kids Android phones.” In 2022, Apple’s CEO Tim Cook was asked whether Apple would fix iPhone-to- Android messaging. “It’s tough,” the questioner implored Mr. Cook, “not to make it personal but I can’t send my mom certain videos.” Mr. Cook’s response? “Buy your mom an iPhone.”
Raising switching costs, as opposed to innovating, is the point of much of Apple’s strategy. It disallows cloud gaming for video games, which would make the expensive hardware of the iPhone unimportant, as much of the computing would be done elsewhere. Apple has banned or degraded attempts to introduce such services, because it would commodify their phones. One Apple manager noted the reason, writing, ‘Imagine buying a [expletive] Android for 25 bux at a garage sale and it works fine . . . . And you have a solid cloud computing device. Imagine how many cases like that there are.” Apple does the same kind of monopoly maintenance across its product lines, crippling non-Apple smartwatches to lock people into the Apple ecosystem, banning anyone but Apple Wallet from using tap-to-pay features, and even forcing automakers to concede to Apple’s choices on digital car keys.
Now, you may think none of this matters. After all, you like your iPhone, and you don’t want to use different messaging services. But there are three reasons why it should concern you. The first is pretty simple. Your iPhone and Apple services would be cheaper if Apple had to compete, because it would lower prices to entice customers who might otherwise go to Android, and you would be able to avail yourself of those lower prices.
The second is that smartphones and watches would improve more rapidly. As with Boeing in the late 1990s, Apple is financializing; it now spends twice as much on stock buybacks as it does on R&D, and that’s because it faces no meaningful competition that forces it to innovate. For sure, Apple has fantastic development capacity, as illustrated by the Vision Pro, but it increasingly degrades the quality of its own flagship product - the iPhone - for the purpose of maintaining its market power. That’s why announcements of a new version of the iPhone are greeted with a yawn when it used to be greeted with euphoria. Again, now we know the extremely modest upgrades are a strategy:
For example, Apple’s vice president of iPhone marketing explained in February 2020: “In looking at it with hindsight, I think going forward we need to set a stake in the ground for what features we think are ‘good enough’ for the consumer. I would argue were [sic] already doing *more* than what would have been good enough.” After identifying old features that “would have been good enough today if we hadn’t introduced [updated features] already,” she explained, “anything new and especially expensive needs to be rigorously challenged before it’s allowed into the consumer phone.”
The lack of innovation introduces the possibility that Apple falls so far behind in AI features that you’d want to switch to an Android phone because the new offerings are so compelling. It’s an immense pain to switch ecosystems, which means it’s strongly tempting to just stick with an inferior product. And as the smartphone becomes more important, worse product quality and a lack of innovation can become dangerous. Thieves, for instance, recently figured out how to steal not just an iPhone, but empty bank accounts and financial features associated with the device. Conversely, we never imagined what personal computers could do in 1981, they were a blank canvas. Restoring mobile phones to a competitive space would likely enable innovations, perhaps whole new industries, that we cannot imagine.
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The last reason to care is that, if this monopolization continues, we are handing over the future to Apple, and not just in smartphones. Using its position as the gatekeeper that lives in the pockets of a billion people, that corporation is entering the financial services, fitness, gaming, social media, news media, entertainment, and automotive markets, “often by doing so in exclusionary ways that further reinforce and deepen the competitive moat around the iPhone.”
For instance, the iPhone is now a wallet, with $200 billion of transactions done via ‘tap to pay’ in 2022 alone, according to the Consumer Financial Protection Bureau. Importantly, the tap-to-pay feature uses a standard near-field communication chip, but Apple Pay is the only app on the iPhone allowed to use tap-to-pay. This exclusionary behavior is intentional, as “Apple envisions that Apple Wallet will ultimately supplant multiple functions of physical wallets to become a single app for shopping, digital keys, transit, identification, travel, entertainment, and more,” and that it will contribute to the stickiness of the Apple ecosystem. (It’s also profitable, Apple already takes a fee of .15% from banks for every transaction that goes over the tap-to-pay on its iPhone.)
The Antitrust Division discovered that Apple has become so powerful that it now bosses around not only banks, but car companies. Apple has already announced that it is going to control the user experience for every car in America. Most new cars are compatible with CarPlay, “an Apple infotainment system that enables a car’s central display to serve as a display for the iPhone and enables the driver to use the iPhone to control maps and entertainment in the car.” It’s a must-have if you want your car to sell. According to the DOJ:
Apple has told automakers that the next generation of Apple CarPlay will take over all of the screens, sensors, and gauges in a car, forcing users to experience driving as an iPhone-centric experience if they want to use any of the features provided by CarPlay.
Apple also has a significant movie studio, it is trying to manage payments for newspapers and games, and getting into an endless number of lines of business, and make them all part of its sticky ecosystem. I don’t care how great you think Apple is, no corporation can run cars, payments, smartphones, movies, maps, and advertising, among other things, and run them well.
As a consumer, none of this may move you to tears. But from the other side, as a business person in any of these industries, it means Apple is the new boss, and likely a neglectful one. And Tim Cook, while skilled at many things, only has 24 hours in a day, and the likelihood he’s going to focus on one industry that only delivers, say, $3 billion a year in a company that makes orders of magnitude more than that, is remote.
Privacy as Pretext
The simplest claim, and perhaps the most important, is that Apple is a liar. Tim Cook parades privacy and consumer protection around as a shield, but as we’ve learned, Apple takes $20 billion a year from Google to be the default search engine in the iPhone, thus directly profiting off the most surveillance intrusive firm in the world.
Apple loves to put out that its control of a single app store is critical for security purposes, but scams flourish because of its neglect. Huge amounts of data leak from iPhone apps to China, without action by Apple. If Apple allowed other app stores, corporations could actually compete on grounds of quality and safety. Imagine a store with just child-safe apps, or extra-secure apps. But Apple only allows one app store, its app store, using privacy and safety as a pretext for monopoly maintenance.
As the DOJ put it, “Apple wraps itself in a cloak of privacy, security, and consumer preferences to justify its anticompetitive conduct,” but it “selectively compromises privacy and security interests when doing so is in Apple’s own financial interest—such as degrading the security of text messages, offering governments and certain companies the chance to access more private and secure versions of app stores, or accepting billions of dollars each year for choosing Google as its default search engine when more private options are available.”
Like the rest of Big Tech, Apple is less a technology development firm than a middleman, standing in between the relationships of consumers and businesses, taking a piece from each. And it strong-arms anyone who tries to disrupt its role as that critical middleman, using coercive contractual terms, denial of access to key technologies, or outright deception via its impressive branding.
But Is Apple a Monopoly?
There used to be a lot more choices in the smartphone market, but today, Samsung and Apple control 90% of the market. Still, one might think that Apple, at least from a consumer’s perspective, isn’t a monopoly. You can, at the end of the day, buy an Android phone.
The Antitrust Division has made a couple of points here. First, Apple has 70% of the ‘performance smartphone market’, aka high end smartphones (mostly excluding prepaid plans with cheap smartphones), as well as 65% of the full smartphone market by revenue. (This is an update, John Gruber helpfully corrected me, pointing out that the full smartphone market number in the DOJ complaint is by revenue share.)That’s not 90%, but it’s a big share, and that share is durable. More importantly, monopolization also means the ability to control price. And Apple controls price, because its customers basically cannot switch. It has the ability to “forego innovation without fear of losing customers to competitors,” a classic sign of a monopoly.
From a different perspective, the market definition question is much tighter. If you’re a consumer, sure there’s Samsung. But an app developer, or a messaging app maker, or automotive firm, or bank, or anyone who has to live in the Apple ecosystem, is operating inside a monopoly. If you make an email program, some of your customers are going to own iPhones, and they will expect an app from you, and thus Apple is your boss. It’s a bit like in the 19th century having one railroad to ship your products. There might be other railroads across the country, but the only one that matters is the one near you that can carry what you make. Similarly, an Android phone doesn’t help you if your customers demand you get your app, or your Toyota car, through the Apple approval process.
This question, of market definition, is one of many that will be hashed out over the next few years, in a set of hearings and a mammoth trial in a New Jersey court room, overseen by a new judicial appointee, Judge Michael E. Farbiarz.
Hope Is a Four Letter Word
One legacy from the Obama years is a pervasive cynicism about politics, a belief that the job of a President is to give lovely speeches. Hope, and governing itself, became a four letter word.
In many ways, Biden, by taking on four multi-trillion dollar firms in a way that Obama could never have imagined, is forcing a reckoning. Because what Biden is doing is *actually* hopeful, not because it makes us feel good, but because it is a reordering of the political hierarchies who structure our lives in ways that foster alienation. It makes us look at the sparkling liars who tell us pretty fables, like Apple, and decide whether we want to be adults, or whether we want to go on allowing ourselves to be ruled by our “betters.”
I have no idea what Americans will decide. There are deep reasons for cynicism and despair. And yet, the government really is getting into gear, and starting to work on our behalf, the way democracy should work. Now we are in the muck, in the moment of governing. It’s a glorious time, because we get to, in our own way, make decisions about the kind of society we want.
Thanks for reading! Your tips make this newsletter what it is, so please send me tips on weird monopolies, stories I’ve missed, or other thoughts. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation, and democracy. Consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
cheers,
Matt Stoller
I love what you write about the current FTC and antitrust division of DOJ. But why is the White House not broadcasting this to the American people? People here just do not know this kind of info and how it can benefit them.
Just the simple fact that all Apps have to be purchased through Apple's app store was enough reason for an antitrust action from day 1.