Apple is facing a new antitrust lawsuit that could dethrone the iPhone

Does Apple have a monopoly on smartphones? The Justice Department thinks so.

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

The Department of Justice, joined by 16 state attorneys general, accused Apple in a New Jersey federal court of maintaining a monopoly on the US market for smartphones, of which the iPhone makes up 65 percent. The complaint alleges that Apple has deliberately thwarted apps, products, and services that would make it easier for users to switch from the iPhone to other smartphones and lower costs for consumers and developers.

The company responded in a public statement Thursday that the lawsuit sets a “dangerous precedent, empowering government to take a heavy hand in designing people’s technology.”

Apple was one of the last remaining big tech companies that had yet to be hit with an antitrust suit of this magnitude: There are also pending suits against Facebook parent Meta, Amazon, and Google.

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

What the lawsuit says

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

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

• It has restricted “super apps” that provide a wide array of functionalities — such as e-commerce, food delivery, transportation, financial services, social networking, and more — because it makes users less dependent on Apple’s ecosystem.
• Until recently, in the Apple App store, it limited the availability of cloud-gaming apps that can be played without expensive hardware, like the iPhone — the idea being that if consumers are going to become attached to a game, Apple wants it to be one that requires an advanced phone like theirs.
• It has prohibited third-party messaging apps from sending or receiving SMS messages through a phone carrier network (rather than through data networks) and made them “worse generally” compared to Apple’s native messaging app.
• It has prevented third-party smartwatches from having access to key functions when paired with an iPhone.
• It has denied users access to digital wallets that work across smartphone platforms and have enhanced features.

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

The lawsuit says that all of this has harmed 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 for smartphones generally.

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

The main challenge for the government, however, is that we’ll never know for certain what other products might have been developed in the absence of Apple’s alleged anticompetitive practices, Scott Morton said.

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

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

“When you’re dealing with innovation competition, there is this difficulty of pointing to specifics,” Scott Morton said. “But at the same time, that innovation is hugely valuable to consumers. So they’re 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 user privacy protection.

But the complaint tries to preempt the notion that privacy can be used as a blanket defense to accusations of anticompetitive behavior, saying that Apple “selectively compromises privacy and security interests when doing so is in Apple’s own financial interest.” For example, text messages sent from iPhones to Androids are unencrypted and could easily be made encrypted.

“There are less anti-competitive ways of achieving privacy much of the time,” Scott Morton said.

Will this lawsuit dethrone Apple as the king of smartphones?

The government hasn’t ruled out structural remedies in its lawsuit, and that 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 demands that Apple be prevented 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 thwart third-party messaging, smartwatches, and digital wallets.

Wu said he expects that the government won’t settle easily.

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

On Thursday, Apple stock was down more than 4 percent. But the company’s core business is a behemoth: the iPhone is the most expensive smartphone on the market, going for as much as $1,599 for the priciest model, and its market share has only grown in recent years, edging out challengers like Samsung and Huawei.

As Scott Morton said, however, it’s hard to tell in the long run what might happen to Apple — or any new innovators who enter the market — if the company is made to stop some of the practices that have allowed it to claim a fifth of the world’s smartphone sales and counting.