Apple’s DoJ Lawsuit Was Inevitable And Will Change The Company Forever

By Anshel Sag, Patrick Moorhead - April 29, 2024

If you read the U.S. Department of Justice’s 88-page lawsuit against Apple, you’ll see that it is based on five key points. Most of those key points relate to different industries that have problems with the way Apple does business and, more importantly, how it has protected its walled garden. Two years ago, I wrote on Forbes about how a lack of consumer portability and choice were negatively affecting the mobile experience. There are additional concerns that have been raised in other regions by other entities, including Spotify, which was the primary plaintiff in a case in Europe that a month ago led to a fine of Apple by the EU to the tune of $2 billion dollars.

I believe that while the EU might have been the first to strike against Apple, the DoJ will certainly not be the last, and that based on Apple’s malicious compliance with the EU’s Digital Markets Act, there will be more penalties levied against the company based on Article 18 of the DMA. In fact, it seems that the EU is already using the DMA to go after Apple, along with Google and Meta, for non-compliance.

Core Complaints By The DoJ Against Apple

In the DoJ complaint, which is joined by 15 states, the U.S. Government specifically points to Apple’s behavior in the mobile market. In the complaint, the DoJ makes many assertions, including that its own past actions against Microsoft during the dot-com era were pivotal in creating healthier competition in the PC market, and that some of the Microsoft remedies may have even helped Apple gain the level of success it has today. I will add that I personally don’t agree with the DoJ’s definition of a “Performance Smartphone Market” for its monopoly claims, but if you read further into the document, you see that it also mentions the entire smartphone market. This makes sense if you look at Apple’s market share in the U.S., where the DoJ has jurisdiction.

The U.S. is the world’s third-biggest smartphone market after China and India, but is also its least competitive, based on an HHI score above 4,300, which compares to China’s 1,600 and India’s 1,100—showing that those are significantly more competitive markets. I expect this index will be referenced by the DoJ in its arguments about why the U.S. is not a competitive market and that Apple is using its dominant market share to behave in a monopolistic way. While the HHI is commonly used to calculate whether a merger should go forward, it is fundamentally a measure of whether a market is competitive.

Without further ado, the DoJ’s main points against Apple are:

  1. Apple harms competition by imposing contractual restrictions, fees and taxes on app creation and distribution.
  2. Apple limits “super apps” such as WeChat that perform many daily functions including social media, payments, banking, video messaging and so on.
  3. Apple also controls cloud streaming apps such as Spotify, Netflix and Google Photos.
  4. Apple uses APIs and other critical access points in the smartphone ecosystem to control the behavior and innovation of third parties to insulate itself from competition.
  5. Messaging apps, especially iMessage, that handle both texting and rich messaging services are key means by which Apple maintains its control.
  6. Apple’s control of how smartwatches operate on its platform limits competitors’ capabilities on iOS.
  7. Apple’s use and control of digital wallets and its restriction of cross-platform wallets on the iPhone impedes innovation and competition.
  8. Privacy and security are not good enough justifications for Apple’s policies.

My Analyst Take

I believe that if the DoJ continues to push its very selective “Performance Smartphone Market” definition, that flawed argument could derail the entire case, given that so much in an antitrust action depends on market definitions. However, it does seem that the DoJ has given itself some wiggle room by saying that the entire U.S. smartphone market is just as relevant for this case as this new subsegment that it has created. It does this in its third claim for relief after it mentions the “Performance Smartphone Market” in its second claim for relief.

The thing that I found most interesting about this case is that Apple is not being sued for one particular practice. Rather, it is being sued for the way it runs its smartphone business, including the operating system, iMessage, App Store, payments and wearables. This is a complete assault on Apple’s most profitable business unit, which generated nearly $200 billion in revenue for the company last year (more than half the company’s total revenue of $383.2 billion). At Apple, the iPhone is king; that’s why this lawsuit is so critical for Apple to defend, and why Apple will not take it lightly. I believe that Apple will deploy its PR and media machine—even more than it already has—to get public opinion on its side, especially among those who already tend to support the company.

This case will take many years to resolve, and the expectation is that Japanese and Korean regulators will likely follow suit with their own antitrust actions, just as the U.S. is, in a sense, following in the EU’s footsteps. The European fine was so high in part because the Commission found that “Apple submitted incorrect information in the framework of the administrative procedure.” This is effectively the EU’s way of saying that Apple lied to them, which is surprising in many respects.

I believe that Apple’s days in court in Europe are far from over, and that it could be fined for its current form of compliance with the DMA. Speaking of the DMA, I believe that Apple’s choice to comply with the DMA only in Europe rather than applying the same policies globally (as it did with USB-C) will likely result in even more restrictive measures and may not even appease European regulators. This decision by Apple will likely push the DoJ to ask for policy remedies similar to those the EU required from Apple in the DMA case. I expect that the DoJ will likely wait and see how Apple’s DMA compliance is received by the EU and build on those remedies as a baseline for what it asks from Apple.

It’s worth noting that when the DoJ’s lawsuit was announced, Apple CEO Tim Cook wasn’t spending time at HQ on damage control. Instead, he was in China opening a brand new store in Shanghai, where Apple has to play much more by the rules because it has much stiffer competition. Apple doesn’t charge for in-app purchases there like it does in the U.S.; otherwise, nobody in China would ever use an iPhone, because WeChat is how people do everything in China—from communicating with colleagues, friends and family to paying for public transit, customer service and food deliveries. When markets are competitive, Apple behaves differently, and the DoJ lawsuit even references this with Apple’s price cut of the iPhone 11 in China in 2020—something Apple has traditionally never done anywhere else. Apple again recently cut prices for the iPhone 15 in China due to renewed competitive pressure.

U.S. consumers have accepted Apple’s behavior for a long time. While I do believe that many of Apple’s actions are designed to tighten up the user experience and reduce friction, many of them also create proprietary, Apple-exclusive solutions that don’t allow for competition. One way that Apple hardens this advantage is with custom silicon, requiring certain Apple-specific hardware capabilities to make a feature work. I believe that we are seeing this DoJ case because so many different companies from various industries have levied complaints against Apple over the years, and the DoJ now has a mountain of evidence from many different sectors.

Because of all this, I believe this lawsuit and others that will follow it will fundamentally change the way that Apple does business and makes money. Apple’s biggest source of growth has been in its services business, which thrives off Apple’s ability to keep its customers’ dollars within its own ecosystem. There are now simply too many companies getting cut off from Apple’s ecosystem while the company reaps all those dollars for itself.

Something that wasn’t brought up much in the DoJ lawsuit was Apple’s advertising business, which has grown rapidly ever since the company implemented stricter privacy controls on third-party apps. The lawsuit did briefly mention Apple’s agreement with Google on its default search engine, which I believe is another point of contention for many of Google’s competitors, who assert that it has a monopoly in search. Google already lost a $2.6 billion lawsuit in 2017 on the grounds that it had abused its dominant search engine position. I believe that one of Apple’s biggest risks to growth will come if the DoJ limits Apple’s control over competitors’ use of its platform for ads. Apple did this, for example, with the implementation in mid-2021 of its App Tracking Transparency framework in iOS 14.5, which contributed to considerable drops in revenue for both Snapchat and Meta in 2022.

Wrapping Up

In the end, I believe that Apple’s business will be fundamentally changed by this lawsuit. Because of the detail and depth of the complaint, there may ultimately be many fixes put in place to remedy Apple’s behavior. Some will likely be more impactful to Apple’s bottom line than others, but ultimately if Apple is as strong a company as its investors believe, it will find other ways to grow and innovate beyond its current structure. After all, Microsoft has successfully rebounded from its own tumultuous years with regulators and has become the most valuable company in the world, ironically by becoming more open and embracing open source rather than shunning it. Let’s see whether Apple changes its ways to follow that approach.

Anshel Sag
VP & Principal Analyst| Website| + posts

Anshel Sag is Moor Insights & Strategy’s in-house millennial with over 15 years of experience in the IT industry. Anshel has had extensive experience working with consumers and enterprises while interfacing with both B2B and B2C relationships, gaining empathy and understanding of what users really want. Some of his earliest experience goes back as far as his childhood when he started PC gaming at the ripe of old age of 5 while building his first PC at 11 and learning his first programming languages at 13.

Patrick Moorhead
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Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.