On March 21, 2024, the US Department of Justice (DOJ) filed a landmark antitrust lawsuit against Apple, which could have significant ramifications on the smartphone ecosystem.1 The complaint highlights that Apple responded to competitive threats by refusing to offer consumers lower smartphone prices or app developers better monetization.2 Instead, Apple “impos[ed] a series of shape lifting rules and restrictions in its App Store guidelines and developer agreements” that allowed it to “extract higher fees, thwart innovation, offer a less secure or degraded user experience, and throttle competitive alternatives.”3 This post outlines the DOJ’s antitrust case against Apple, and explores potential changes that Apple could make to its ecosystem in light of the litigation.
Antitrust allegations against Apple:
Section 2 of the Sherman Act4 prohibits monopolization and attempted monopolization of any part of trade or commerce.5 The DOJ’s complaint accuses Apple of monopolization and attempted monopolization of the “performance smartphone market” (which has been differentiated from cheaper feature phones) and the broader smartphone market in violation of Section 2 of the Sherman Act.6 The complaint quotes past-CEO Steve Jobs who, after successfully launching the iPhone with a small number of apps, discussed how to “further lock customers into our ecosystem” and “make Apple’s ecosystem even more sticky.”7 The DOJ accuses Apple of allegedly maintaining a monopoly in the smartphone market through anticompetitive and exclusionary conduct by (i) implementing contractual rules and restrictions that delay or restrict app developers from innovating new features and functions that may threaten Apple’s in-house offerings; (ii) driving away iPhone users from products and services that compete with Apple (such as music, gaming, cloud storage) by increasing the friction in switching; and (iii) charging the infamous “Apple tax” (30% from app developers).8 The DOJ claims that Apple limiting new features and functions provided by third-parties on the iPhone did not make economic sense unless it had “some other compensation reason to do so, such as protecting its monopoly profits.”9
The DOJ alleges that Apple strategized to achieve its monopolistic goals,10 and highlights five broad examples of technologies that would have increased competition in the market, but have been suppressed by Apple:
- Super apps, i.e. apps with broad functionalities or “mini programs.” These apps usually host or connect other apps and services without developers having to use the iPhone’s APIs or code.11 Apple imposed multiple contractual restrictions on these apps, which discouraged developers and denied access to high quality experiences to users. For example, since 2017, Apple required apps in the US to display mini programs using a flat, text-only list of mini programs without icons or tiles, or categorizations based on recently played games or other games from the same developer.12 Further, mini programs could not be monetized by developers, either through Apple’s App Store payment system or in-app payment methods.13
- Cloud streaming gaming apps, which would allow users to play high quality games across platforms. Powerful hardware is unnecessary for cloud-based gaming, but risks rendering expensive iPhones redundant by giving users the option to purchase cheaper Android devices to play games with others. Apple restricted these apps, which limited gaming options for its users and stifled the growth of cross-platform apps.14
- Third-party messaging apps that work across all smartphones. Apple suppresses this technology by diminishing the user experience as compared to iMessage. Apple allegedly degraded the quality, privacy and security for its users, and caused friction in use of such third-party apps such as through restrictions on usage of the iPhone camera for video previews.15
- Smartwatches. By making the Apple Watch only compatible with the iPhone and by limiting the functions of non-Apple smartwatches connected with the iPhone (such as notifications), Apple users have been denied access to non-Apple high-performing smartwatches which may have better user interfaces, services and battery-life.16
- Digital wallets that work across smartphone platforms. Apple allegedly “maintains complete control over how users make tap-to-pay payments with their iPhone” and allows users to only use Apple Wallet, which exclusively uses Apple Pay used to process digital payments.17 Apple also allegedly encourages banks and merchants to participate in the Apple Wallet ecosystem whilst simultaneously blocking the same partners from developing better payment products and services that could be offered directly to users using Apple devices.18
Global antitrust enforcement actions against Apple:
The DOJ’s complaint follows antitrust proceedings that have been brought against Apple in other jurisdictions. For instance, the European antitrust regulator recently levied a €1.8 billion fine on Apple for imposing restrictions on rival music streaming platforms which prevented them from informing Apple users about alternative and cheaper subscription plans outside of the App Store.19 The EU’s enforcement action against Apple may have been the first, but the DOJ’s action doesn’t appear to be the last. In South Korea and the Netherlands, Apple could face potential fines over the fees it charges app developers to use alternative payment processors.20 The DOJ’s complaint, filed in the U.S. District Court for the District of New Jersey, is broader than claims brought in other countries, as it focusses on Apple’s entire product and service ecosystem and not just App Store policies. It appears as a “complete assault on Apple’s most profitable business,” i.e. the smartphone business including iOS, iMessage, App Store, payments and wearables, all of which generated nearly $200 billion in revenue last year.21
Following suit from Microsoft:
Though this case may take years to reach any form of a conclusion, this could be the beginning of the end to Apple’s walled garden of products and services. Apple may need to take a leaf from Microsoft’s book, who faced antitrust violations in the 1990s and ultimately agreed to stop restricting third-party browsers and media players from running on Windows computers.22 Microsoft had bundled its Internet Explorer browser with its Windows operating system products, and blocked API access to middleware like Netscape and cross-platform programs like Apple’s QuickTime.23 Through a consent decree, Microsoft agreed to make various APIs available to third-party developers, which interestingly included and benefitted Apple.24 Ironically, the DOJ alleges that Apple now stifles third-party apps from running on the Apple devices in order to maintain its monopoly, but this would not have been possible without Microsoft’s consent decree.25After the decree, Apple launched a cross-platform version of iTunes that could run on Windows computers, which enabled Apple to sell millions of iPods to Windows users.26 The success of iTunes and the iPod led to the launch of Apple’s flagship iPhone.27
Unfencing the Apple ecosystem:
Apple will likely need to open its walled-garden ecosystem to cross-function with third-party apps and services. We could potentially see Apple devices such as the iPhone and iPad made more interoperable with third-party apps and services. Gazing into the crystal ball, Samsung Galaxy smartwatches could be made to pair with iPhones to provide a similar experience as compared to connecting the Apple Watch with the iPhone. Apple could amend its payment policies, especially vis-à-vis developers by allowing them to monetize mini programs and providing them with more payment options to provide users. Other wallets including Google Wallet may be provided as an option to iPhone users, allowing a host of third-party fintech products. Texts received from Android users could get a make-over or integrated with iMessage so the Android-iOS and iOS-iOS texting experiences are not differentiated. Cloud-based gaming apps and apps with fully functional mini programs may make a comeback to the iPhone. Ultimately, this is the time for Apple to innovate and reinvent itself, through better integration with often superior third-party products and services.
*The author thanks Professor Christopher Hockett, Lecturer at Berkeley Law, for his guidance on this article.