The U.S. Department of Justice (DOJ) filed an antitrust suit against Apple Inc. in April, accusing the firm of a broad pattern of anticompetitive conduct associated with its control of the iOS operating system for smartphones. Apple’s iPhone is the U.S. smartphone market leader, with about a 60 percent market share in 2023. The lawsuit is the latest of several filed against tech companies by Biden administration competition authorities.
Understanding the complaint’s allegations of anticompetitive conduct and the DOJ’s overall economic theory of harm requires some unpacking. Many of the claims at first sound like traditional antitrust claims of product tying (such as Apple selling its iOS operating system and native apps together) and vertical restraints (such as Apple not providing the same iOS integration with competing apps as they do with their own). But Apple, more than any other large technology company, has built its brand for decades on providing consumers with relatively restricted but secure and user-friendly digital ecosystems. And none of the products and services at issue in Apple’s alleged anticompetitive behavior are lucrative enough to justify the type of blockbuster verdict against Apple that the DOJ seeks.
The DOJ invokes its 2001 case against Microsoft often in the Apple complaint. The Microsoft case was built on traditional tying and vertical restraint charges, but with Apple, the DOJ constructs a far different theory from superficially similar-sounding charges. To the DOJ, these alleged acts are part of a pattern of “broad-based exclusionary conduct” that let Apple entrench itself and further dominate the smartphone market. This vague and often circular theory of harm fails to connect the dots between the alleged anticompetitive acts and Apple’s robust market leadership among U.S. consumers.
The allegations against Apple
The DOJ characterizes Apple’s treatment of its iPhone ecosystem as “broad-based exclusionary conduct,” and presents the specific allegations of its case as “examples of Apple using these mechanisms to suppress technologies that would have increased competition among smartphones.” The alleged exclusionary conduct comes in two forms.
First, the DOJ argues that Apple has restricted access to and functionality of its iOS operating system for smartphone apps that compete with offerings from Apple itself. The complaint highlights several alleged examples of this conduct in the markets for messaging apps, digital wallets, and smartwatches. Second, the DOJ focuses on Apple’s native App Store and argues Apple’s leading smartphone market share allows the company to set higher fees and control app offerings more tightly than the competing Android ecosystem (which holds most of the remaining 40 percent U.S. market share).
Apple will likely counter that its tactics are not anti-competitive and give its large customer base the features they most want. Apple’s “walled garden” approach has defined the brand since the early Macintosh desktops of the 1980s. In effect, consumers in the Apple ecosystem give up some freedom and flexibility relative to other computers or smartphones in exchange for ease of use, heightened security, and the aesthetics they associate with the Apple brand.
Antitrust concerns about product tying and vertical foreclosure usually involve a platform owner making their service worse for consumers while degrading the quality of competing offerings on the platform even more. This may help to explain the DOJ’s eagerness to mention its early-2000s case against Microsoft at nearly every opportunity.
In that case, the court found that Microsoft leveraged its similarly large market share in PC operating systems to dominate markets for web browsers and other software. The ultimate settlement reached by Microsoft and the DOJ required Microsoft to make its Windows operating system easier to use with web browsers that competed with its own Internet Explorer. The court in the Microsoft case was convinced that building large market shares for software such as web browsers was an end unto itself, providing new profit opportunities that motivated the anti-competitive behavior.
In addition to the hurdle of Apple’s “walled garden” defense, it does not appear that the native apps and App Store at issue in the case are large enough profit centers to incentivize Apple to engage in similarly anti-competitive behavior. Relative to the $200 billion in revenue Apple earned from smartphone sales in 2023, it is hard to argue that digital wallets, messaging apps, or even the App Store are large enough prizes to constitute ends unto themselves.
Consider Apple’s handling of digital wallets. While major competitors to Apple Pay like PayPal and Zelle are readily downloadable and usable on the iPhone, iOS restricts tap-to-pay services (more popular than other methods, such as QR code scans, especially in the U.S.) to its native application. Samsung and Google, leading providers of Android phones, allow this functionality for many digital wallets. Apple charges banks a 0.015 percent fee for every credit card transaction using Apple Pay while Android competitors Samsung and Google make no similar charge.
But that amounts to Apple earning just under $1 billion in worldwide revenue over the entire lifetime of Apple Pay, according to the complaint. While a large amount of money when examined in isolation, this pales in comparison to Apple’s annual revenue from smartphone sales in the hundreds of billions of dollars. Even if a court did find Apple unfairly gained a foothold in the digital payments market, this would be a small matter relatively speaking rather than grounds for “structural remedies” such as division breakups that DOJ antitrust chief Jonathan Kanter has hinted he prefers (the DOJ opted not to formally propose remedies in its initial complaint).
Now consider the App Store, estimated by analysts to have generated $27 billion in revenue for Apple in 2023. While still small relative to $200 billion in annual smartphone sales, the App Store is lucrative and central enough to Apple’s smartphone business that allegations of restrictive behavior or high fees could be of greater concern. But this is precisely where Apple’s “walled garden” approach is also most relevant in its defense.
As evidence of alleged anticompetitive conduct, the DOJ contrasts Apple’s approach of restricting downloads to its own App Store and approving every app listed to Android’s historically more open approach. While these measures sound restrictive, we routinely allow retail stores to select the products they sell, and publications, both print and online, to moderate the content they publish. Apple has a history of similarly tight controls central to its competitive strategy that has existed for much longer than the iPhone and a customer base that expects and may prefer this approach.
The DOJ’s theory of harm
The DOJ attempts to unite the allegations discussed above under a theory of harm that is quite different from traditional product tying or vertical restraints:
“Apple protects its monopoly power in smartphones and performance smartphones by using its control over app distribution and app creation to suppress or delay apps, innovations, and technologies that would reduce user switching costs or simply allow users to discover, purchase, and use their own apps and content without having to rely on Apple.”
Rather than leveraging its position in the smartphone market to unduly gain market share in new and lucrative markets, the DOJ believes Apple’s conduct entrenches its position in the smartphone market. The evidence the DOJ provides for this theory, and the economic logic itself, is vague and deeply flawed.
The DOJ emphasizes switching costs as locking users into the iPhone ecosystem. While correct that replacing smartphones—expensive hardware rarely purchased more than once every couple of years—involves costly switching, this is true of all smartphones and not something imposed by Apple. The DOJ sees Apple’s restrictions on interoperability with competitors’ messaging apps, digital wallets, and smartwatches as the company “delaying, degrading, or outright blocking technologies that would increase competition in the smartphone markets by decreasing barriers to switching to another smartphone, among other things.”
In service of this story, the DOJ also invokes Apple’s exclusion of cloud-streaming gaming apps and “super apps,” which create ecosystems where users can purchase and download apps outside of Apple’s walled garden. Tight overall control over the App Store is also considered manipulative conduct that somehow increases users’ switching costs, and Apple is further criticized for not allowing competing app stores on the iPhone.
Some or all of the alleged conduct might be judged anticompetitive if the DOJ could show Apple’s intent was trapping users in its ecosystem rather than creating the ecosystem its customers want. Apple’s longtime successful branding as a “walled garden” suggests the opposite. It is difficult to envision remedies for decreasing Apple’s control over app distribution and use within the iPhone ecosystem that would not undermine the security, usability, and aesthetics many consumers prefer, which is fundamental to Apple’s competitive strategy. The DOJ’s theory rests on a “broad pattern” of exclusionary conduct because none of the specific acts clearly impose switching costs without making the iPhone ecosystem consumers have already chosen even more desirable.
The DOJ tries to get more specific when it suggests Apple’s tactics have stunted or prevented growth and innovation for cross-platform ecosystems or more cloud-based phones. These are at best interesting conjectures about a hypothetical smartphone market with very different fundamentals than what we observe.
In a sense, the DOJ has ignored Occam’s Razor. The Biden administration seeks to explain the path along which the U.S. smartphone market has developed through presumed nefarious conduct by the market leader and imaginative scenarios about how the market might otherwise have evolved. Apple’s sustained market leadership is explained far more simply and completely by its consistent production of smartphones most U.S. consumers prefer.