The Government Finally Comes for Apple
In a lawsuit filed in conjunction with 15 states and Washington, D.C., the Department of Justice has claimed that Apple has a “monopoly” in its primary market. The lawsuit takes an expansive view of Apple’s power, widening its focus beyond the company’s App Store — the subject of a number of civil lawsuits in recent years, as well as the core of the E.U.’s recent antitrust actions against Apple, which this month resulted in a €1.8 billion fine — to include Apple Pay, iMessage, and FaceTime, prohibitions on cross-platform “super apps,” and Apple’s ecosystem of other products, including the Apple Watch, which it says the company treats with anticompetitive favor. Apple has gone from “revolutionizing the smartphone market to stalling its advancement,” said Deputy Attorney General Lisa Monaco.
It’s a surprisingly aggressive approach, with a core premise that Apple will almost certainly challenge: that the iPhone represents a “smartphone monopoly.” Where previous legal challenges have claimed that Apple’s App Store policies are more narrowly problematic, creating unfair conditions for app developers and stifling competition within Apple’s “walled garden” of software, this one makes the additional argument that, through the iPhone, Apple has more control over the smartphone market — and other industries — than it first appears.
It goes something like this: While the iPhone accounts for 65 percent of new smartphone sales in the United States, its “market share by revenue is over 70 percent in the performance smartphone market,” the lucrative, trend-setting tier of smartphones in which, the government claims, “Apple’s own executives recognize the company competes.” While these numbers have been “durable,” they could also increase soon:
Apple’s smartphone market shares understate Apple’s dominance and likely growth in key demographics, including among younger American consumers. For example, one third of all iPhone users in the United States were born after 1996, as compared to just 10 percent for Samsung, Apple’s closest smartphone competitor. Surveys show that as many as 88 percent of U.S. teenagers expect to purchase an iPhone for their next smartphone.
A theoretical future market share of 88 percent does sound a bit more like a classic monopoly, but the reality now is that lots of other smartphones exist, many with comparable functionality and pricing, and they sell well.
The lawsuit acknowledges this but argues that Apple is perfectly capable of stifling innovation and driving up prices anyway by making it harder to switch phones, limiting access to its platform for companies that might make competing software, and making it difficult for companies that make hardware accessories, including smartwatches and earbuds, to connect with iPhones as smoothly or extensively as Apple’s own versions. Combined with the App Store’s status as the largest and most lucrative market for mobile software developers, cross-platform or not, Apple has, the government says, real monopoly power. (In response, Apple says: “At Apple, we innovate every day to make technology people love — designing products that work seamlessly together, protect people’s privacy and security, and create a magical experience for our users. This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets.”)
Apple has been pretty up-front about its plans to bring customers into a comprehensive hardware and software ecosystem. Apple products function as ads for one another, not just because people like them but because in some cases they only fully work in the presence of other Apple products. The lawsuit is full of quotes from current and former Apple executives, including the late Steve Jobs, talking about the need to “lock customers into our ecosystem,” or to create “obstacle[s] to iPhone families giving their kids Android phones.” It sets up the success of the iPod as a sort of villain origin story:
The iPod experience gave Apple a recipe for the future: a high-end device, a large number of platform participants (i.e., music labels and consumers), and a digital storefront. More importantly, it gave Apple a playbook: drive as many consumers and third-party participants to the platform as possible and offer a wide selection of content, products, and services created by those third parties to consumers.
After the iPod came the iPhone and eventually its App Store, through which Apple “capitalized on the work of these third parties while maintaining control and monetizing that work for itself.”
It’s an antitrust lawsuit, so it tells a particular set of stories about scale: Apple before the iPod was an underdog, while Apple today is one of the most valuable companies on Earth; building a closed, interdependent ecosystem when you’re small or new to a category is just good business while maintaining a closed, interdependent ecosystem with hundreds of millions of people in it is a little too good of a business. Internal emails about creating “stickiness” in their products certainly haven’t aged that well, but there also isn’t much evidence that the company’s philosophy has changed: The lawsuit contends that Apple is carrying this same playbook forward not just with its newer devices, but into the automotive industry, for example, with CarPlay — “Apple leverages its iPhone user base to exert more power over its trading partners, including American carmakers, in future innovation,” the lawsuit says, referring to its post-Apple-car plans to move into infotainment systems.
Some of the issues government attorneys are getting at here won’t really connect with regular smartphone users, not that they necessarily need to. There’s a lot of talk about how Apple effectively prohibits “super apps,” which in this context means apps that offer “broad functionality” and “a consistent user experience that can be ported across devices,” and an extensive section about cloud streaming game apps. Apple Wallet and Apple Pay are under scrutiny, too, for being subtly sticky: “The absence of cross-platform digital wallets with tap-to-pay capability on the iPhone makes it harder for iPhone users to purchase a different smartphone.”
Where the lawsuit is most persuasive — and where legal and technological remedies are easiest to imagine — is in the sections about how Apple handles popular and basic communication features. Apple initially claimed that FaceTime, the voice- and video-calling service included with Apple devices, would be an open protocol; instead, it remains limited to Apple users and benefits from deeper integration into the phone’s software than competing services like WhatsApp. The lawsuit really hits its stride when it talks about iMessage:
[I]f an iPhone user messages a non-iPhone user in Apple Messages—the default messaging app on an iPhone—then the text appears to the iPhone user as a green bubble and incorporates limited functionality: the conversation is not encrypted, videos are pixelated and grainy, and users cannot edit messages or see typing indicators. This signals to users that rival smartphones are lower quality because the experience of messaging friends and family who do not own iPhones is worse—even though Apple, not the rival smartphone, is the cause of that degraded user experience. Many non-iPhone users also experience social stigma, exclusion, and blame for “breaking” chats where other participants own iPhones… This social pressure reinforces switching costs and drives users to continue buying iPhones—solidifying Apple’s smartphone dominance not because Apple has made its smartphone better, but because it has made communicating with other smartphones worse.
Do green bubbles violate Section 2 of the Sherman Act? That’s for the U.S. District Court for the District of New Jersey to decide. But they do represent a convincing argument that Apple could behave better than it has: iMessage took a fundamental, cross-platform function — texting — and turned it into a proprietary protocol while limiting competitors’ ability to build truly comparable software. It’s pretty annoying! It’s a real barrier to switching phones as well a case where Apple’s usual defenses — that this is about smooth user experience, security, and privacy — are especially unconvincing.