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Apple Faces Slicing: DOJ Presents its Monopoly Case Against Apple Inc.

Anna Thompson

Apple Faces Slicing: DOJ Presents its Monopoly Case Against Apple Inc.
d3sign via Getty Images

On March 21 of this year, the U.S. Department of Justice alongside sixteen state attorneys general filed a federal suit against Apple, Inc. in the U.S. District Court of New Jersey. The Complaint alleges that Apple engages in anticompetitive and monopolistic practices to hinder its customers’ and partners’ ability to switch to other smartphones like Android. It outlines five areas in Apple’s ecosystem where the company restricts competition to maintain its market power, though it says the list is not exclusive: (1) super apps that provide broad functionality across devices, (2) cloud-based gaming apps, (3) messaging, (4) smartwatches, and (5) digital wallets.

Apple is likely to file a Motion to Dismiss and argue that the government’s definition of the relevant market is flawed, its perceived anticompetitive conduct complies with the law in a fiercely competitive market and is central to protecting its customers’ security, and that it has no duty under antitrust laws to deal with other companies on particular terms.   

The Complaint states that while “[a]ll smartphones compete against each other in a broad relevant market”, “the most relevant market to assess [Apple’s] conduct is a narrower submarket” that excludes the “entry-level tier.” It thus offers two categories, “performance smartphones” and smartphones generally in the US as the broader market. Apple may push against the relevant market posed here and stipulate that a broader, even global, perspective would be more appropriate.

Allegations against the different Apple products

The Complaint outlines five alleged ways that Apple maintains its market monopoly:

I. Super Apps

The government alleges that Apple stifles the creation of super apps that would enable iPhone users and developers to be more dependent on an app than the iPhone. ¶ 61. Super apps are usually developed with standard code like Javascript, and contain smaller “mini programs” like games, payments, and booking services. See ¶ 61, 65. In the Apple system, apps on the app store typically have a single-purpose functionality and must be developed using Apple’s language, Xcode. The government says this creates consumer reliance on the iPhone and the app store rather than one super app, because developers must create programs that conform to these restrictions. If a developer could offer one app created with Javascript on both Apple and Google’s app stores, then a customer would feel more comfortable switching to another smartphone.

Instead, the Complaint alleges, Apple takes steps to “throttle the popularity of mini programs” by restricting their visibility on the Apple app store, further imposing disincentives for developers to create these programs. ¶ 67, 69. As a result, consumers are left with several apps that cannot currently be consolidated into a single program with one password, have interoperable features, or be easily accessed when switching to a different smartphone.

II.  Cloud-based gaming apps

The Complaint further alleges that Apple disincentivizes the creation of cloud streaming apps to ensure its customers will continue to purchase the iPhone for its powerful hardware. A cloud streaming app allows gamers to run programs remotely on the cloud while playing games on their phone. Since the intense computing is happening on a remote server, the actual hardware in the phone need not be extremely advanced to run these programs. ¶ 73. Cloud-based apps thus allow its users to purchase less-expensive smartphones while still enjoying “computationally intensive program[s].” ¶ 72. This could make iPhone users more willing to switch to another smartphone.

Cloud apps also apparently pose advantages to game developers because developers could create one game that can be accessed via the cloud through any device. Instead, the Complaint alleges, Apple created barriers to funnel developers into creating games that used the iPhone’s hardware capabilities rather than the cloud. To illustrate this point, the government points to Apple’s past requirement of submitting cloud games individually for review and requiring gamers to download software for each separate cloud game they download. ¶ 76, 77. It alleges that Apple does not allow users a choice to offer or download cloud-based streaming apps on its app store, thereby creating an environment where high-computational games require the advanced hardware of Apple to provide a satisfactory gaming experience.

III. Cross-Platform Messaging

The Complaint alleges that Apple limits capability of messaging between iPhones and other smartphones to maintain its monopoly power in the market. It points to the fact that messages between an iPhone and a non-Apple smartphone have worse features than messaging between two iPhones: user cannot send large files, live videos, edit messages, or send reactions, such as the “Like” thumbs up or “Love” heart. ¶ 83. This implies to consumers that non-Apple phones are worse. ¶ 90. Apple also allegedly limits functionality of third-party messaging apps on its app store, such as WhatsApp and Facebook Messenger. ¶ 84. Consumers can only use those programs if both the sender and receiver have downloaded the program and created an account, and Apple prevents those apps from operating while the app is closed. ¶ 85–86. To illustrate this point, the Complaint points out that sending an iMessage is as easy as “typing [your] phone number into the ‘To:’ field and send[ing] the message.” ¶ 85. The Complaint alleges that Apple is maintaining dominance in market share not because its capabilities are so much better than its competitors, but because “it has made communicating with other smartphones worse.” ¶ 90.

IV. Smartwatches

The government next alleges that Apple prevents smooth interoperability between its iPhone and third-party smartwatches to disincentivize its customers from buying non-Apple products. Smartwatches connect to smartphones and have many functionalities including monitoring health data, receiving and sending messages and phone calls, and making payments. The Complaint first alleges that Apple “steer[s]” users into purchasing an Apple Watch and leaves them disincentivized from switching smartphones, because the Apple Watch is only compatible with the iPhone. ¶ 96. Further, the government claims that Apple makes its iPhone incompatible with other smartwatches to prevent its customers from purchasing a less expensive smartwatch. Third-party smartwatches have limited capability to respond to messages and accept calendar invitations when interacting with iPhones, for example. ¶ 101. The iPhone also frequently disconnects from non-Apple smartwatches via Bluetooth, whereas it maintains consistent connectivity with Apple watches. ¶ 102. Finally, the government argues that cellular-enabled Apple Watches require an entirely separate phone plan than a non-Apple smartphone, but an iPhone user can have the same phone number and interoperability with their Apple Watch. ¶ 103.

V. Digital Wallets

The government alleges in its Complaint that Apple “block[s] third-party developers from creating digital wallets on the iPhone with tap-to-pay functionality” to maintain “complete control” over the digital payment market for iPhone users. ¶ 104. Digital wallets are apps that can hold credit cards, tickets, and other credentials on a smartphone. ¶ 105. By double-clicking the lock button on an iPhone, users can make payments by tapping their phone on a payment terminal. However, the Complaint alleges that other developers could create competitive digital wallet apps but-for Apple’s conduct preventing them from doing so. ¶ 106. Further, it says that the Apple Wallet disincentivizes its customers from switching to another smartphone device because they would have to create an entirely new wallet through their new smartphone. ¶ 109. It states that the dominance of the Apple Wallet harms the economy generally, since it is the only digital wallet that charges banks for its transactions. ¶ 113. Indeed, Apple charges a 0.15% fee, whereas other smartphone companies do not charge a fee.

The Complaint states that these five anticompetitive practices are “hardly exhaustive” and serve merely as examples to “exemplify the innovation Apple has stifled.” ¶ 119. It lists out other examples, including that Apple:

  • “[U]ndermine[s] third-party location trackable devices” that can function across devices. ¶ 120.
  • “[I]mpair[s]” video apps like Zoom and steers users toward FaceTime. ¶ 120.
  • Requires iOS browsers to use its engine, WebKit. ¶ 120.
  • Has placed new protocols around its “eSIM” technology that may further disincentivize customers from switching away from the iPhone. ¶ 120.
  • Blocks capabilities of non-Apple cloud storage apps to make it more difficult to switch devices. ¶ 120.
  • “[U]ses restrictions in sales channels to impede the sale and distribution of rival smartphones.” ¶ 120.
  • “[W]orsen[s] user experience” by steering its customers into using Siri rather than superior third-party voice assistance apps. ¶ 120.
  • Offers subscription services that continue to increase Apple’s market power and maintains its hold on the market. ¶ 121-122.
  • Requires that digital car keys must be interoperable with its digital wallet. ¶ 124.
  • Forces automakers into making cars more easily connected to Apple CarPlay rather than other programs. ¶ 125.

The government’s allegations seem to fall into two categories: to maintain a monopoly, 1) Apple makes it difficult for consumers to exit its environment and 2) difficult for developers to reduce their reliance on Apple.   

The DOJ’s Monopoly Argument

To prevail in a monopoly suit against Apple, the government must show that Apple 1) has monopoly power in a relevant market, and 2) willfully maintained that power through exclusionary conduct that harmed the competitive process, as opposed to through a “superior product, business acumen, or historic accident,” 3) without procompetitive justifications.

“Monopoly power” means that a company can “control prices[,] exclude competition,” or “force a purchaser to do something [it] would not do in a competitive market.” This can be proven directly or indirectly. Here, direct proof would be that Apple chose to increase the cost of iPhones or prevented competitors from gaining footing in the smartphone market. Indirect evidence would require antitrust enforcers to establish Apple’s high market share of the relevant market (here, they allege this to be in the 65-70% range) and show barriers to entry against competitors, like network effects or the cost of switching devices.

Second, the government must show that Apple maintained its alleged monopoly through exclusionary conduct, rather than by competing on the merits and offering a better product than its rivals. That means establishing that any (or all) of the five technologies cited in the complaint “reasonably constituted nascent threats” to Apple’s smartphone monopoly, and that Apple’s conduct in impairing those apps and functionalities was “reasonably capable of contributing significantly” to its continued monopoly. It is important to understand, however, that the government does not need to prove any of these technologies would (or even could) become a replacement for smartphones. Rather, antitrust enforcers’ burden is to show that these technologies, absent Apple’s conduct, either themselves could have disrupted Apple’s monopoly or could have enabled other companies to do so.

If the government can prove these two elements, Apple will have an opportunity to argue that its practices and policies were necessary to achieve procompetitive benefits such as increased security, privacy, or functionality. If Apple can articulate a procompetitive justification that is not merely pretextual, the burden would then shift back to antitrust enforcers to show that Apple could have achieved these benefits through means that are substantially less restrictive of competition. There is a growing consensus among antitrust commentators that even if no other means are available, courts should conduct a final balancing analysis that weighs the anticompetitive harms against procompetitive benefits. It is unclear whether a court would do so here.       

Apple will likely file a Motion to Dismiss

We can expect Apple to file a Motion to Dismiss. This may include a discussion on relevant market, where the DOJ would argue encompasses the US smartphone market and “performance smartphone” market, while Apple calls for a global perspective. It will likely argue there is intense competition in the smartphone market, and it is merely the dominant player due to the superiority of its products. Second, as discussed above, it will argue that it isolates its ecosystem from external programs and products to protect its consumers’ privacy and security. Third, we can expect it will argue that it is not legally required to make its products interoperable with products from other companies. The first two arguments are likely not to be addressed at this stage. However, the third argument poses an interesting question at the Motion to Dismiss stage. All businesses, even monopolists, are generally allowed under antitrust laws to refuse to work with its competitors. However, there are exceptions when monopolists either terminate a prior relationship with a competitor or carry out exclusionary schemes to obtain (or maintain) market power. Apple could run into problems with this second exception.

Apple dominates the smartphone market and has created a dominant ecosystem that consumers may feel difficult to leave. From one view, this is because Apple offers a superior product in a competitive industry. From another perspective, this is because Apple hinders potential disruptors and competitors. This case is likely to go on for many years and is likely to have broad implications in the broad variety of sectors that Apple’s ecosystem touches.

A prior version of this article appeared in Bloomberg Law.