Apple hit by another US antitrust charge

The US Justice Department has accused Apple (US:AAPL) of using its market advantage to block rivals, and force customers to keep buying its technology through “exclusionary and anticompetitive conduct”.

A new lawsuit launched on Thursday will seek to open up Apple’s applications market and reduce its cut from sales. It will also intervene in its messaging and payment functions. 

US Attorney General Merrick Garland said Apple was hurting consumers and developers with its behaviour. “We allege that Apple has consolidated its monopoly power not by making its products better — but by making other products worse,” he said. 

These cases take a long time to resolve meaning any impact on Apple's earnings won't be for a year or two. "A settlement will be reached in some form likely over the next 12 - 18 months," said Wedbush Securities analyst Dan Ives. 

Ives has not changed his bullish position, believing the case won't lead to the break up of the Apple ecosystem but concedes it will come at some cost. "Apple clearly has to find a way to eventually settle this case, pay a hefty fine, and ultimately find some compromise with developers on the App Store structure down the road," he wrote in a note. 

The lawsuit comes as investors have looked more to Microsoft (US:MSFT) and other more artificial intelligence (AI) exposed tech giants, such as Nvidia (US:NVDA). Microsoft overtook Apple in market capitalisation last year and the gulf has widened more recently as AI interest rolls on. Sales in China, a key market, have also fallen in the past year, resulting in flat sales levels in 2023. 

Apple said the Justice Department’s case could be seen as an attack on innovation. “This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets,” the iPhone maker said. “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 company will “vigorously defend” the lawsuit, which it said was “wrong on facts and the law”.

Garland identified two main areas that he alleged broke antitrust law. The first is that Apple imposes fees and restrictions that limit the features developers can offer iPhone users. The second is restricting the “access points of connection between third-party apps and the iPhone’s operating system, degrading the functionality of non-Apple apps and accessories”. 

He said this approach to third-party apps was linked to the 30 per cent fee developers have to pay on transactions paid on iPhones and other Apple products. This is also the centre of Apple’s fight with Epic Games, which makes the Fortnite game. 

Epic encouraged gamers to download Fortnite outside the official ‘App Store’ and Apple responded by blocking Fortnite sales. This is the focus of a current court case in Australia, while in the US, in 2021 a court ordered Apple to allow links to alternative means of downloading apps in the App Store. This week, Epic alleged Apple had not done so in a new court filing. 

Apple’s share price is down 4 per cent since the first reports on the lawsuit late Wednesday, US time.

Excerpts from the Justice Department filing

For many years, Apple has built a dominant iPhone platform and ecosystem that has

driven the company’s astronomical valuation. 

At the same time, it has long understood that disruptive technologies and innovative apps, products, and services threatened that dominance by making users less reliant on the iPhone or making it easier to switch to a non-Apple smartphone. 

Rather than respond to competitive threats by offering lower smartphone prices to consumers or better monetisation for developers, Apple would meet competitive threats by imposing a series of shapeshifting rules and restrictions in its App Store guidelines and developer agreements that would allow Apple to extract higher fees, thwart innovation, offer a less secure or degraded user experience, and throttle competitive alternatives. 

… 

Apple’s conduct also stifles new paradigms that threaten Apple’s smartphone dominance, including the cloud, which could make it easier for users to enjoy high-end functionality on a lower priced smartphone—or make users device-agnostic altogether. As one Apple manager recently observed, “Imagine buying a [expletive] Android for 25 bux at a garage sale and it works fine . . . . And you have a solid cloud computing device. Imagine how many cases like that there are.” 

Simply put, Apple feared the disintermediation of its iPhone platform and undertook a course of conduct that locked in users and developers while protecting its profits. Critically, Apple’s anticompetitive conduct not only limits competition in the smartphone market, but also reverberates through the industries that are affected by these restrictions, including financial services, fitness, gaming, social media, news media, entertainment, and more.

Unless Apple’s anticompetitive and exclusionary conduct is stopped, it will likely extend and entrench its iPhone monopoly to other markets and parts of the economy. For example, Apple is rapidly expanding its influence and growing its power in the automotive, content creation and entertainment, and financial services industries–and often by doing so in exclusionary ways that further reinforce and deepen the competitive moat around the iPhone.

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