The U.S. Government Wants To Determine Your Smartphone Functionality: Analyzing the DOJ Antitrust Lawsuit Against Apple
“Bigness is not badness.” It’s a phrase that has lived with me since my antitrust course in law school. The U.S. government cannot punish a company simply for being big and successful. But in effect, it’s what they’re doing in their recent antitrust lawsuit against Apple.
Instead of empowering consumers to decide Apple’s fate in the smartphone market, the U.S. government wants to determine your smartphone functionality. Down to the way Apple configures your SMS messaging with those pesky green-bubbled Android people.
The U.S. Department of Justice (DOJ) wants you to think Apple is Microsoft reincarnated circa 1998. I know the Biden administration wants to score election-year points against big corporations, but Apple’s 65% market share compared to Microsoft’s 90% plus market share in the 1990s is not equivalent.
Why not close the carried interest loophole? Or prevent guys like Warren Buffett from paying lower tax rates than their secretaries?
Nope, instead the DOJ is targeting one of the greatest American businesses of all time, with no smoking gun. I would understand if price fixing, territorial allocation, or some other blatantly obvious anticompetitive behavior were present, but there’s no evidence of the sort against Apple.
“By applying the same playbook of restrictions to CarPlay, Apple further locks-in the power of the iPhone by preventing the development of other disintermediating technologies that interoperate with the phone but reside off device.”
– DOJ complaint against Apple
Seriously? Was Apple CarPlay the anticompetitive straw that broke the DOJ’s back?
Look, I’m not here to argue the government should not hold Apple’s feet to the fire. They should. But 88-page antitrust lawsuits are not the way to do it, especially when they could destroy Apple’s business and prevent it from capitalizing on the next big thing (artificial intelligence!), similar to how Microsoft missed much of the early internet and mobile innovations after their antitrust litigation.
Apple is not Microsoft circa 1998. Below are the four main reasons why. We’ll conclude with why this lawsuit was brought now and what the government should have considered instead.
1. Market Share Disparity: Apple vs Microsoft from the 1990s
Microsoft once wielded near-hegemonic dominance over personal computing. They controlled over 90% of the market in the 1990s and early 2000s, with almost everyone running the Microsoft Windows operating system. In 2024, that market share has dropped to ~72%.
Microsoft’s operating system market share today is still higher though than the 65% smartphone market share that’s bringing Apple so much scrutiny. In fact, Apple’s iPhone growth has slowed recently. Investors are also increasingly concerned that Apple is behind in artificial intelligence.
Expand the relevant market beyond the U.S., and the headwinds are even stronger against Apple. In particular, Apple faces stiff competition in China from Huawei. Any punitive action against Apple in America will threaten Apple’s global market share even more.
Market share alone, however, is not dispositive of antitrust violations. Bigness is not badness, or at least that’s historically been the case. There must be evidence of unreasonable restraints on trade, anticompetitive activity like price fixing, or some other abuse of market power.
Microsoft used its market share decades ago to enter into exclusive agreements with PC manufacturers, requiring them to pre-install Windows on their machines. They bundled Internet Explorer with Windows, making it virtually impossible for other browser competitors like Netscape Navigator to gain market share.
Remember, at over 90% market share, Microsoft was the only meaningful game in town.
Microsoft was even accused of predatory pricing by selling products below cost to undercut and drive out rivals. They were also accused of discriminatory licensing practices where they charged different prices in different markets based on the level of competition they faced.
Contrast those arguably abusive practices with the allegations of how Apple has abused its market share:
“Apple’s anticompetitive and exclusionary course of conduct is exemplified by its contractual rules and restrictions targeting several products and services: super apps, cloud streaming apps, messaging apps, smartwatches, and digital wallets.”
– DOJ complaint against Apple
The allegations against Apple focus almost entirely on functionality. How certain contractual rules and restrictions limit what developers and users can do in the Apple ecosystem and on their phones in particular.
Should Apple be forced by the government to approve super apps? Some of which can have serious privacy and security concerns (see WeChat)?
Or force Apple to offer cloud streaming apps so users can play video games of all types without having to worry about buying the latest hardware?
What this lawsuit misses is the reality that viable and competitive alternatives exist. If consumers don’t like what Apple’s closed ecosystem offers, they can vote with their dollars. This was not a reality during Microsoft’s antitrust litigation when the two main alternatives in Apple (a much smaller version!) and Linux each had small single-digit market shares, respectively.
2. Microsoft had no legitimate competitors, whereas Apple does
Microsoft’s competitive landscape in the 1990s and early 2000s was very different from Apple’s competition in smartphones today. In fact, Microsoft still has a greater operating system market share (~72%) relative to what Apple has in smartphones (~65%).
Samsung and other Android-powered devices offer consumers a diverse array of choices. Outside the U.S., these devices are even more prevalent. And as mentioned, demand for iPhones in China appears to be waning as consumers turn to homegrown Chinese rivals like Huawei.
Granted, Apple has only one main hardware competitor in Samsung, but numerous Android developers offer viable alternatives. And these companies are not in the single digits of market share like Linux and Apple were in the personal computer space against Microsoft decades ago.
So for all of the DOJ’s efforts to paint Apple’s current economic state with the same broad brush as Microsoft circa 1998, their painting is woefully lacking in comparative details. The two situations are remarkably different.
And if the DOJ has such big problems with Apple controlling everything in its environment from hardware and software to the cloud and app store, why are they suddenly bringing it up now?
3. A closed-source ecosystem is an Apple philosophy, not an anti-competitive tactic
Go back to the beginning of Apple, the personal computing company. There was a battle between open-source and closed-source ideologies. Steve Jobs, Apple’s beloved and notorious founder, was squarely in the closed-source camp.
This wasn’t for anti-competitive reasons. He wanted to seamlessly integrate hardware and software, so each was designed for the other. It was generally less buggy, more secure, and more private than the open-source model that allowed anything and everything to connect with it.
The point, however, is that Apple has always been this way. The DOJ lawsuit reads like it was contrived as some master plan to dominate the competition and abuse market power. For those of us who grew up in the 1990s and before, there were many years when Apple was an almost bankrupt personal computer company. It’s hard to imagine a scenario where Jobs and even Tim Cook designed their closed-source architecture with anticompetitive motives in mind.
If people liked one Apple product, then were they more likely to buy others that seamlessly synced and connected with them? Of course! If anything, this was pro-competitive as it pushed the boundaries on new hardware, new applications, and new technology that many other tech firms soon copied and followed.
There are good arguments that had Apple not stuck with its closed-source philosophy, it would have significantly detracted from the high-quality user experience. Fewer consumers would have agreed to enter their closed world if it wasn’t appealing and useful. But it was and still is for many.
Although the DOJ wants you to think it’s killing innovation and hurting consumers.
4. The U.S. government punished blatantly anticompetitive acts by Microsoft, but now they want to determine your smartphone functionality
Microsoft used predatory pricing and other anticompetitive tactics at a time when they were the only real game in town. In the smartphone world today, Apple throws its weight around as the 800-pound gorilla, but there are viable alternatives.
Given that reality, are we comfortable with the government nit-picking on what functionality smartphones should have? Whether technology should be more open-source or closed? Whether super apps should be approved or not?
Absent evidence of blatantly anticompetitive behavior – of which I’ve seen none to date – it’s hard to justify this antitrust lawsuit against Apple. Instead of letting consumers and the market at large drive market dynamics and innovation, the government has decided to put its thumb on the scale. And instead of issuing regulatory enforcement actions through agencies like the Federal Trade Commission, it’s taken out some of its most powerful artillery: antitrust lawsuits that strike at the core of Apple’s business.
I fear that if the DOJ is successful here, Apple’s creativity and innovation will be constrained, detrimentally affecting the industry at large. It could be greatly restricted in what functionality it offers on all of its devices, not just smartphones (CarPlay is at stake!).
Many consumers have willingly entered Apple’s controlled and closed-source ecosystem with their eyes wide open. They have not been deceived by who’s really running the show between their hardware and software. They know it’s not the user or developer – it’s Apple.
But Apple can get away with this because their products continue to have an elite degree of quality that few can even match let alone surpass.
I wish I could have said the same about some of the late 90s Windows products.
So why even bring an antitrust lawsuit against Apple, well over a decade after the release of the first iPhone and app store? Multiple decades after their first closed-source computer hit the market in the 1970s?
It’s complicated and well, political
The political nature of this lawsuit is clear from this statement in the DOJ press release:
Apple Inc. is a publicly traded company incorporated in California and headquartered in Cupertino, California. In fiscal year 2023, Apple generated annual net revenues of $383 billion and net income of $97 billion. Apple’s net income exceeds any other company in the Fortune 500 and the gross domestic products of more than 100 countries.
In the lawsuit, the DOJ also highlighted the following multiple times:
“In fiscal year 2023, Apple spent $30 billion on research and development. By comparison, Apple spent $77 billion on stock buybacks during the same year.”
– DOJ complaint against Apple
Translation: Apple stifled innovation while making its shareholders rich.
The U.S. government wants to vilify Apple for being “big” when bigness should not equal badness. They also don’t mention how the likes of Warren Buffett have praised Apple for their stock buybacks, as they increase shareholder ownership at zero cost. But why mention the benefits to shareholders?
President Joe Biden made it clear in his State of the Union that, among other things, he wants corporations to pay their fair share. To play by the rules.
And while all of that is fair and fine from a tax perspective, unless the government can demonstrate (conclusively) that anticompetitive actions are unreasonably restraining trade and hurting competition, they should refrain from antitrust lawsuits. It’s a waste of taxpayer dollars when market solutions exist.
Taxpayer dollars aside, consider the damage these types of lawsuits can have on the company caught in the government’s crosshairs. Microsoft took years to recover. Apple could easily face a similar fate if it succumbs to legal distractions.
But if the government does prevail against Apple, at least we can take solace in one fact: we’ll all have smartphones with government-approved functionality.
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