The Absurd Apple Antitrust Lawsuit

The U.S. Department of Justice (DOJ) and 16 states are suing Apple over its alleged monopoly of the smartphone market. It's an absolutely bonkers lawsuit, based on weird ideas about business and even weirder ideas about government.

The latest in a long series of antitrust suits filed against tech companies, the Apple lawsuit shows just how eager the Biden administration is to bring business decisions under federal control.

The case "illustrates a shift among enforcers towards a 'big is bad' mentality more generally," said Jennifer Huddleston, who works on technology policy for the libertarian Cato Institute. "Such an approach seeks to achieve preferred political goals or penalize politically disfavored companies based on the size of a company, the number of competitors, or the welfare of those competitors rather than asking if the large company achieved success in the market by providing a product consumers prefer or through anti-competitive means."

If the Apple Antitrust Suit Were Against a Physical Store

There hasn't been a ton of outrage over the suit's radical premises yet, perhaps because it's a tech company being attacked. The relative novelty of the topics this lawsuit deals with—apps, interfaces, etc.— allows authorities to portray Apple's actions as uniquely nefarious.

Applying the government's arguments to a physical retailer helps highlight how crazy they are. Let's use a popular chain store like Target as an example.

When I walk into Target, I know I'm going to be presented with a finite number of products that Target bigwigs somewhere have approved for sale. Not just anyone can walk into Target and start selling their own stuff. Nor are rival retailers like Walmart or Kohl's able to set up shop within Target stores.

This may harm rival brands, or random people who aren't able to peddle their products in Target. And it means shoppers at this particular store see somewhat less choice and perhaps higher prices than they would otherwise—I can't go into Target and buy a Macy's dress or a thrift-store couch, for example. But these policies also add value for consumers, who can expect consistency across Target stores and have confidence that the products therein have been vetted in some way. And they benefit Target, too, in direct ways (like making it more likely that shoppers will buy Target-brand products) and indirect ways (like generating higher brand confidence and loyalty).

Stores like Target may also take other steps to boost their own products, like offering more markdowns on them, giving them better placement in store aisles, or marketing them more aggressively. They probably won't offer computer kiosks inside Targets where people can shop online at competitors. And again, nobody bats an eye at any of this. We understand there are other places where people can sell their products, and that shoppers can go elsewhere if they want products that Target doesn't sell.

It would be nuts if the federal government stepped in and said that Target must, within its own walls, give equal priority to all brands and allow shoppers to access storefronts for its competitors. Or if authorities said it's a crime to inconvenience shoppers by making them travel to different locations to shop at different stores.

Yet this is exactly what the government is doing when it comes to Apple.

An Illegal 'Monopoly Over Smartphones'

In a civil complaint filed last Thursday, the DOJ and 16 state attorneys general accused Apple of violating Section 2 of the Sherman Act, a law allowing the government to intervene against companies said to be acting "in restraint of trade or commerce."

"Apple illegally maintains a monopoly over smartphones by selectively imposing contractual restrictions on, and withholding critical access points from, developers," the DOJ states in a press release. "Apple undermines apps, products, and services that would otherwise make users less reliant on the iPhone, promote interoperability, and lower costs for consumers and developers."

That sounds bad—until you read the government's theories about how Apple does this. The feds complain about practices like Apple limiting App Store offerings, charging fees to developers who sell their products there, and making iPhones more compatible with Apple products than with third-party offerings.

"When developers imagine a new product or service for iPhone consumers, Apple demands up to 30 percent of the price of an app whose content, product, or service it did not create," states the suit. "Then when a consumer wants to buy some additional service within that app, Apple extracts up to another 30 percent, again for a service Apple does not create or develop. When customers buy a coffee or pay for groceries, Apple charges a fee for every 'tap-to-pay' transaction, imposing its own form of an interchange fee on banks and a significant new cost for using credit cards."

Would app developers like to give Apple less of a cut? Undoubtedly. Would merchants like to pay no fees when people for their products? I'm sure. And they have an easy way to do this: Don't sell their apps through the Apple App Store and don't accept Apple Pay.

Again, an outside example may be instructive here. Consider a farmer's market or craft fair. Vendors often pay for a booth in such marketplaces. Vendors would probably prefer a free booth, but no one thinks this is a matter for federal intervention. Even if there are only one or two other farmer's markets or craft fairs in town, the seller still has options like opening up a new storefront or selling from a stand on the seller's existing property, just as app developers can offer their apps for download and sale on their own websites (or offer free versions within the App Store without being charged by Apple). Vendors choose to sell at centralized markets for the same reason that app developers choose to sell through the app store: It gives them a leg up. They have access to a wider consumer base, and also a level of vetting that may inspire consumer trust.

If an individual seller finds the fees make these upsides not worth it, they'll move on. If enough sellers do that, the market—in this case, the Apple App Store—will have incentive to change. It's unclear why the federal government needs to be involved at all, and it's especially unclear why it should be in the business of making more money for some companies at the expense of other companies

The Justice Department also scolds Apple for having "sole discretion to review and approve all apps and app updates" and for "prohibit[ing] the creation and use of alternative app stores curated to reflect a consumer's preferences with respect to security, privacy, or other values." And yet tech companies are increasingly being held legally liable for third-party misbehavior. If Apple exerts less control and an app that is dangerous gets through, Apple could be in trouble. And even if it won't be legally liable, it could face reputational damage if it allows too many scammy or otherwise terrible apps to be sold in its store.

Apple has a vested interest in keeping up certain standards in its app store, just as Target has a vested interest in preventing random snake oil from lining its store shelves and just as farmer's markets may want to exclude people selling buckets of moldy old crab apples.

'Artificially Constraining' Competitors

Aside from objections to the fees and rules for app developers, the lawsuit lists five major objections related to Apple allegedly suppressing technologies that the government thinks would make iPhones better and/or more useful.

Apple makes its Apple Watch compatible only with iPhones and not with other phones. Apple allegedly suppresses "super apps" that can "provide a user with broad functionality in a single app," as well as cloud streaming game apps and third-party digital wallets. And while it doesn't prevent iPhone owners from using third-party messaging apps, it doesn't make these third-party tech tools as integrated or functional as it does it's own messaging app. For instance, Apple stops "third-party apps from sending or receiving carrier-based messages," which only Apple Messages can do. "By doing so," the complaint states, Apple "harms developers by artificially constraining the size of their user base."

It's a bizarre conception of business that says Apple should be legally obliged to help random developers—including those competing directly with Apple Messages—expand their user base.

Likewise, why should Apple have to make its smartwatch compatible with smartphones other than iPhones? Perhaps this helps steer Apple Watch owners to buy iPhones. But it may instead (or also) be true that owning an iPhone steers people to buy an Apple Watch, or that the exclusive arrangement leads some people to avoid both Apple Watches and iPhones. In any event, none of this is the government's business.

One of the dumbest parts of the complaint is where it says Apple could make more money if it had less rules for app developers, since "limiting the features and functionality created by third-party developers—and therefore available to iPhone users—makes the iPhone worse and deprives Apple of the economic value it would gain as the platform operator." The DOJ goes on to say that "it makes no economic sense for Apple to sacrifice the profits it would earn from new features and functionality unless it has some other compensating reason to do so, such as protecting its monopoly profits."

It's a funny definition of a monopoly being used here—like saying Kleenex has a monopoly on Kleenex. Obviously, it does. But people can buy other types of facial tissues, just as Apple's control of iPhones doesn't mean people can't buy other types of smartphones.

That part of the suit also demonstrates either a lack of imagination or disingenuous framing, because there are quite obvious reasons other than monopoly maintenance why Apple might want to limit the functionality or availability of third-party apps. Perhaps Apple sees it as better for its bottom line to streamline the iPhone user experience than to offer a wider array of messaging options. Perhaps it thinks iPhone users prize design uniformity and quality control over access to more apps. Perhaps Apple worries that it's not designed to function as well with certain third-party tools, and that users would blame the bugs not on the third parties but on Apple. The idea that Apple limits what can be on iPhones or in the App Store only out of some weird monopoly maintenance ploy is just silly.

Conclusion

As far as consumer complaints go, of course, there's nothing wrong with some of the DOJ's concerns. We might wish that every product we owned was compatible with every other product we owned and that they worked in perfect tandem. We might wish we never had to consider tradeoffs between price, function, design, compatibility, etc.

Where this gets crazy is the federal government saying: Consumers being able to choose whether to use a product is not good enough. We're going to step in and say that this business has to make a competitor's products more accessible. It has a legal duty to undermine its own business interests to help outside—and many would argue inferior—products compete.

In the vein of other recent antitrust actions against tech companies, particularly under the Biden administration, the Apple suit relies on an absurd conception of how the law should work. And it's a conception that could seriously harm innovation, weaken the position of U.S. tech companies, and mess with products many people like.

And many people really, really love Apple products, including iPhones.

The bottom line: Nobody has to use an iPhone, and no developer has to distribute its app through the App Store. There are other ways to communicate, other smartphone options, and other ways to distribute apps (including other ways to distribute apps to iPhone users). That many people still carry iPhones and distribute their apps through the App Store speaks to the fact that many people find the phone's upsides and the App Store's upsides stronger than any downsides.

The good news is that the Supreme Court has already ruled against suppositions like those the government makes in this lawsuit.

"Under US Supreme Court precedent (e.g., Verizon v. Trinko), Apple has no antitrust duty to assist its competitors or to afford them special access to aspects of its platform, and it appears unlikely that the DOJ will win in court," said Mercatus Center antitrust and competition scholar Alden Abbott, former general council with the Federal Trade Commission, in an emailed statement.

The suit "ignores the Supreme Court's teaching that antitrust protects the competitive process, not individual competitors," Abbott added. "Major globally powerful foreign firms would be the real beneficiaries of this lawsuit, weakening the competitive position of the US digital sector vis-à-vis China."

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