The antitrust lawsuit against Apple that could dethrone the iPhone explained

The Biden administration filed a sweeping antitrust lawsuit against Apple on Thursday that targets a product that has long been the main driver of revenue for the company’s $2.76 trillion business: the iPhone.

The Justice Department, joined by 16 state attorneys general, accused Apple in federal court in New Jersey of holding a monopoly on the US smartphone market, of which the iPhone accounts for 65 percent. The lawsuit alleges that Apple intentionally thwarted applications, products and services that would make it easier for users to switch from the iPhone to other smartphones and reduce costs for consumers and developers.

The company responded in a public statement on Thursday that the lawsuit sets a “dangerous precedent, empowering the government to take on a heavy role in designing human technology.”

Apple was one of the last remaining major tech companies not yet hit by an antitrust lawsuit of this magnitude: There are also pending lawsuits against Facebook parent company Meta, Amazon and Google.

“Antitrust has changed and is actually back in the FDR style,” said Tim Wu, a professor at Columbia Law School and the architect of the Biden administration’s antitrust policy. “I think the hallmark of FDR-style antitrust is that they didn’t play around the edges. If they thought an industry was anti-competitive, they sued everyone, including the biggest monopolists, for things that were core to their business.”

What the lawsuit says

At the heart of the lawsuit is “really a story about innovation, and disrupting and controlling the path of innovation to preserve an existing monopoly,” said Fiona Scott Morton, a professor at the Yale School of Management and former chief economist in the DOJ’s antitrust division. .

The lawsuit cites five examples of how Apple allegedly suppressed technology that would have improved competition in the smartphone market:

• It limited “super apps” that provide a wide array of functionality — such as e-commerce, food delivery, transportation, financial services, social networking and more — as it makes users less dependent on Apple’s ecosystem.

• Until recently, the Apple App Store limited the availability of cloud gaming apps that could be played without expensive hardware like an iPhone — the idea being that if consumers were going to get hooked on a game, Apple wanted it to be one that required advanced a phone like theirs.

• It banned third-party messaging apps from sending or receiving SMS messages over a phone carrier’s network (instead of data networks) and made them “generally inferior” to Apple’s native messaging app.
• It prevented third-party smartwatches from accessing key functions when paired with an iPhone.
• It has denied users access to digital wallets that run on smartphone platforms and have enhanced features.

The lawsuit cites internal communications and messages from Apple executives, including emails and meeting transcripts, to show that the company was aware that its App Store policy would have the effect of discouraging competition.

The lawsuit alleges that all of this has hurt the market for “performance” smartphones, defined as smartphones with “higher-quality cameras, better battery life, wireless charging and advanced biometrics such as face scanning,” as well as smartphones in general .

“They say Apple has monopolized this one type of market — the most lucrative market — and I think the definition of the market will be very important to the success of the case,” Wu said.

The main challenge for the government, however, is that we will never know for sure what other products might have been developed without Apple’s alleged anticompetitive practices, Scott Morton said.

Still, the Federal Trade Commission’s recent case against Illumina, a maker of gene-sequencing machines, suggests the government may have a chance, she said. The FTC argued that Illumina’s acquisition of young cancer test developer Grail would discourage innovation and raise prices for consumers. But Illumina said that argument is only speculative because it is impossible to predict what cancer tests will be invented in the future.

The FTC won the case, forcing Illumina to sell in December. The same could happen in Apple’s case.

“When you’re competing in innovation, it’s hard to pin down the specifics,” Scott Morton said. “But at the same time, that innovation is extremely valuable for consumers. So those are very important markets to protect.”

Apple’s most likely defense is that users simply prefer their devices and that the choices outlined by the DOJ were made in the service of user privacy, Wu said. Indeed, Apple is an industry leader in protecting user privacy.

But the lawsuit tries to preempt the idea that privacy can be used as a blanket defense to charges of anticompetitive behavior, saying Apple “selectively compromises privacy and security interests when it is in Apple’s own financial interest to do so.” For example, text messages sent from iPhones to Androids are not encrypted and can easily be made encrypted.

“In most cases, there are less anti-competitive ways to achieve privacy,” said Scott Morton.

Will this lawsuit dethrone Apple as the smartphone king?

The government hasn’t ruled out structural remedies in its lawsuit, which could include something as drastic as breaking up Apple’s business or, on the less intense end of the spectrum, other methods of restoring competition in the app distribution market. The lawsuit seeks to prevent Apple from undermining super apps and cloud streaming apps on the App Store, as well as from using private APIs (tools to communicate with other software) to prevent third-party messaging, smartwatches and digital wallets.

Wu said he expects the government will not settle easily.

“One thing that I think has been completely different about this administration is that they’re not willing to take 20 cents on the dollar,” he said, comparing the Biden administration to the Bush and Obama administrations.

Apple shares fell more than 4 percent on Thursday. But the company’s core business is a behemoth: The iPhone is the most expensive smartphone on the market, costing as much as $1,599 for the top model, and its market share has only been growing in recent years, surpassing rivals like Samsung and Huawei.

However, as Scott Morton said, it’s hard to say in the long run what might happen to Apple — or any new innovator entering the market — if the company is forced to end some of the practices that have allowed it to lay claim to a fifth of smartphone sales. of phones in the world and counting.