U.S. V. Apple Lawsuit Could Affect American Competition And Innovation

The Department of Justice (joined by 15 states and the District of Columbia) sued Apple in federal court on Thursday, claiming the company has illegally monopolized the U.S. smartphone market. The case, however, transcends antitrust policy and has big implications for American Capitalism and competition.

The lawsuit, which could drag on for years, has a low probability of success. At the heart of the plaintiffs’ case is that “Apple has consolidated its monopoly power not by making its own products better—but by making other products worse,” said Attorney General Merrick B. Garland in a statement yesterday. What the case overlooks, however, is that Apple consumers choose to pay a premium for iPhones because they find them to be superior products.

Apple instantly pushed back against the case. “If successful, it would hinder our ability to create the kind of technology people expect from Apple—where hardware, software, and services intersect. It would also set a dangerous precedent, empowering government to take a heavy hand in designing people’s technology.”

The case’s real significance is that it could stifle innovation by one of America’s premier high-tech companies. This in turn would tend to undermine dynamic competition and harm United States economic growth. It would also weaken the U.S. in its strategic competition with China for leadership in the digital technology sectors that will drive the global economy.

The Apple Complaint Is In Tension With U.S. Antitrust Principles

DOJ asserts that Apple has disincentivized iPhone customers from switching to other smartphones by preventing the growth of “super apps” that can be used on different smartphone platforms. DOJ also claims that Apple has blocked the development of cloud streaming services that can be used without expensive smartphone hardware; has degraded the quality of messaging with non-Apple smartphones; has designed the Apple watch to work best with iPhones; and has designed its “Apple wallet” service to inhibit the creation of “cross-platform” digital wallets.

In essence, DOJ’s complaint is that Apple should have cooperated with its rivals to “open up” its iPhone platform and create greater compatibility between iPhones and rival Android-base phones. This poses problems for DOJ under U.S. antitrust case law dealing with illegal monopolization.

To succeed in its argument, DOJ will have to show that Apple’s course of conduct has no explanation apart from an effort to harm competition.

Apple, which said it believes the “lawsuit is wrong on the facts and the law” and promised to “vigorously defend against it,” will undoubtedly explain that its actions are all aimed at creating a curated experience for customers with enhanced security, conferring major benefits on Apple consumers—and a major economic efficiency. Such actions are not “exclusionary” in the antitrust sense, and thus there is no monopolization or attempted monopolization under Sherman Act Section 2, which bars such practices.

The U.S. Supreme Court has long held that the Sherman Act’s touchstone is promoting consumer welfare. Apple could easily argue that its actions benefit Apple consumers. That they’re willing to pay far more for iPhones than for Android phones indicates that they value them far more. Interfering with Apple’s practices that create this value would harm Apple consumers, make iPhones more like Android phones and degrade dynamic competition, Apple could maintain.

Specifically, Apple could argue that the very features limiting platform interoperability complained of by DOJ are those that enhance system security and create added value for iPhone customers. It could also note that the rapid growth of the Apple app store has created opportunities for software developers, benefiting many new businesses as well as consumers.

DOJ emphasized when filing the suit that Apple uses privacy and security claims as an “elastic shield” and imposes a 30% “tax” on apps downloaded from the App stores and on in-app purchases. Apple might well counter that Apple consumers (who, of course, interact with its App Store) are more satisfied than consumers of its competitors, as reflected in the booming revenue of its small App Store developers. Moreover, Apple might stress that, as pointed out by Insight Partners, 30% is “actually comparable to the fees charged by similar platforms like the Google Play store.” This suggests that Apple is merely engaged in sound welfare-enhancing business practices, rather than monopolistic exploitation.

While some Android customers might prefer better access to messages sent by iPhones or to a few other iPhone features (amenities they are not currently willing to pay for), Apple is not legally required to provide such access. The Supreme Court has held that even a monopolist has no general antitrust duty to assist its competitors. (This reflects U.S. antitrust doctrine that antitrust laws protect the competitive process for the benefit of consumers, not the fortunes of any particular competitor.)

Moreover, requiring Apple to open its platform more to Android users would diminish the quality-based competition between Apple and Android phone makers. Apple would have a reduced incentive to invest in enhancing the quality available only to its customers, thus making them worse off in the future.

Regardless of the details spelled out in the case, DOJ’s assertion that Apple is a monopolist in U.S. smartphones, which is necessary for a successful prosecution, may be questionable, in light of revenue statistics compiled by Backlink.com.

Android phones (many of them made by giant multinationals like Samsung) accounted for between 69% and 75% of the global smartphone market share during the 2016 to 2023 period. Over the same time frame, iPhone shares fluctuated in the 19% to 29% range—hardly the mark of a dominant firm, let alone a monopolist.

The suit points out that Apple’s share of the U.S. smartphone market (the relevant market, according to DOJ) exceeds 65%. Notably, however, iPhone shares fell in the 53% to 59% range between 2016 and 2023, while Android shares fluctuated from roughly 41% to 45%. There is no showing that Android is rapidly losing ground and about to be minimized. Apple obviously is not the global market leader.

Moreover, Apple could claim that it is not a monopolist in the U.S., merely a very successful competitor in the smartphone market whose share merely reflects American consumers’ preference for its curated quality features and its high security.

The Big Picture Implications Of The Apple Case

In short, Apple’s legal position is very strong. Nevertheless, it is not unassailable. DOJ may be expected to devote major resources to the case, and the Apple prosecution is likely to drag on for several years, including possible appeals (par for the course in big monopolization cases). This will subject the company to costly legal uncertainty.

During that time, Apple management might “pull its competitive punches” and invest less in improving the iPhone system, to the detriment of its customers and dynamic competition with Android. Furthermore, to the extent litigation risks reduce Apple’s market capitalization below what it otherwise would have been, Apple may invest less in key technologies of the future, including AI and cloud computing.

Even if DOJ somehow were to win after many years, the relief it obtained—an injunction covering the many practices (and possibly others) alluded to in DOJ’s complaint—would be virtually impossible to administer by a court. This would lead to constant haggling and litigation over whether future actions by Apple fell within the decree, thereby hobbling Apple and diminishing its future innovation.

In any event, whoever eventually wins the Apple case, the likely loser is the competitiveness of the American digital high-tech sector and the U.S. economy.

With this lawsuit, the U.S. is following the example of the European Union, in its effort to micromanage digital competition and hobble major American competitors, including, of course, Apple. The EU has produced no leading platforms and very little real innovation in the digital sector, unlike the U.S. One questions whether the U.S. government would want to emulate that experience.

Most significantly, the Apple lawsuit also weakens the competitive position of the U.S. digital sector vis-à-vis China, a result counter to American strategic interests.

A recent Competitive Enterprise Institute study by Joseph Sullivan explains how antitrust lawsuits against American tech-sector leaders harm innovation in cutting-edge sectors such as AI. Such suits could also have a “potentially destructive” impact on U.S. national security interests, according to Loren Thompson, writing in Forbes, who stresses that emerging technologies identified by the Defense Department “as top priorities for the future are software-driven, commercial innovations.”

Might there be any upsides to DOJ’s lawsuit? Any potential positives that could come from the case, such as reduced iPhone prices and more flexible access to the iPhone platform and its App Store, would likely be accompanied by corresponding negatives, such as lower quality iPhones and reduced incentives for smartphone innovation.

In sum, there is a real risk that the DOJ Apple lawsuit may undermine U.S. global innovation, economic and national security interests, without yielding significant pro-competitive benefits.