Randy Picker reviews the context of the Department of Justice’s lawsuit against Apple and the questions of merit and the competitive obligations of dominant firms driving the case.
Also, read analysis on the Apple lawsuit from Herbert Hovenkamp, Fiona Scott Morton, and Maurice Stucke.
The Department of Justice’s new antitrust suit against Apple attacks the heart of how Apple operates its iPhone platform. For better or worse, Apple has consistently believed that hardware and software should be fused together. Customers who didn’t share that view could take their business elsewhere and did exactly that for decades when the Apple Macintosh sat with a single-digit market share. But the iPhone, of course, changed all of that and now the United States government wants to open up the iPhone platform to more competition. That will not be an easy case to win, though I suspect that the DOJ knows that, but we also shouldn’t expect easy cases to get litigated. Those cases typically settle. The cases that go to the mat are tricky situations where the government knows that it is trying to make new law and where the target of the lawsuit sees the government as trying to destroy the soul of the firm. This seems to match the new lawsuit against Apple exactly.
When Apple launches a new product—say the next iPhone—it routinely emphasizes the tight integration of Apple’s hardware and software. That approach hasn’t always served Apple well. Apple took that approach when it launched the Macintosh in 1984. The Mac heralded a revolution in how we used our personal computers with its new graphical user interface. Microsoft tried to leave its old operating system, MS-DOS, behind when it released Windows 1.0 in 1985. Windows took time to gain traction—the product didn’t really take off until Windows 3.1 in 1992—but Microsoft achieved a dominant position in computer operating systems as new firms emerged to make clones of the IBM PC. All of those companies needed to license operating system software and they knew where to go to get it: Microsoft. As Windows rose with each new PC maker and the Mac stagnated in its Apple walled garden, a critical conceptual takeaway from the Mac v. Windows competition became clear: Open beats closed.
Until it didn’t. With the iPhone, Apple once again built a device where hardware and software were married together. It again was competing with an open alternative, initially Microsoft’s own failed efforts in smartphone software, but eventually Google’s Android and the handset makers using that software. The iPhone that Steve Jobs announced in January 2007 took the closed notion right to the edge: there was no app store and no real way to add new programs. A powerful computer perhaps capable of so much more yet born locked down.
As Apple moved to start selling the iPhone on June 29, 2007, it recanted only partially. Apple would support “Web 2.0 applications which look and behave just like the applications built into the iPhone.” These third-party apps would not have the same access to the iPhone that Apple’s apps had. Apple thought it was drawing a sensible line to preserve the reliability and security of the iPhone. This would have been a world of open third-party apps, as Apple would not have been in the middle between users and developers. No app curation and no app fees.
Developers wanted more and Apple would eventually make that possible with the launch of the App Store in July 2008. With the App Store, the iPhone became a true platform, with Apple selling handsets to users like you and me and selling distribution services to developers based on the intellectual property that Apple had embedded in the platform. Developers could pay Apple as much as 30% of the cash price of an app to sell its products in the App Store, but developers of free, ad-supported apps paid Apple nothing.
The enormous success of the iPhone and also Android and its associated handsets has posed a question for competition policy. Are these firms succeeding on the merits? Or are there practices at work that, whatever the underlying merits of the product, should be tamed to foster more competition? These are worldwide products and, as the DOJ complaint makes clear, the market in say China—which the DOJ seems to almost admire in the complaint—doesn’t necessarily look like the market in the U.S. Europe was an early mover and it hit Google with a multi-billion euro fine in July 2018. I was a skeptic then and Europe has moved on to much more direct regulation with its new Digital Markets Act. The European Commission just started new DMA investigations of Apple, Google and Facebook to try to change how these firms operate. The U. S. has considered a series of bills that would also regulate these firms, but none have passed and so antitrust law is the natural path forward. The DOJ has multiple suits pending against Google, while the FTC has cases pending against Meta and Amazon. The DOJ’s new suit against Apple completes the set, at least for now.
Government complaints are particularly tantalizing, as the government has seen lots of documents that we haven’t. The targets of suits are frequently big aggressive companies that don’t necessarily always see things eye-to-eye internally. The evidence will play out over time (in public, I hope, as these firms are not necessarily eager for lots of scrutiny). The complaint is also complex with its focus on super apps, cloud streaming apps and more (including, the dreaded green bubble.)
For me, to simplify a little, the conflict crystalizes nicely in the first sentence of paragraph 134 of the complaint: “The harms to smartphone competition caused by Apple’s conduct are amplified by Apple’s decision to grant itself exclusive distribution rights to iPhone users through the Apple App Store.” Yes, Apple has built a vertically integrated platform with sharp limits on what it does and does not make available to third parties. Apple doesn’t sell iOS to any handset maker. Microsoft tried that strategy in smartphones and failed, while Google tried a different version of that strategy and succeeded. Apple worked over years to build a capacity to design the chips that now power its devices and it doesn’t sell those chips to outsiders. Qualcomm, MediaTek and others do that. And, yes, Apple doesn’t allow competing app stores, even as Android has used exactly that model.
To date, U.S. antitrust law has been clear on the idea that firms are allowed to compete and win, legitimately, and then to make money once they do that. As the DOJ states correctly, the iPhone is a platform and Apple has some finely calibrated choices to make in making the platform valuable for all of its customers—handset users, developers and more—while also earning legitimate returns on its extensive investments in the platform. That was a critical idea in play in Apple’s mainly successful defense against Epic’s recent antitrust suit. And U.S. antitrust has imposed only a very narrow obligation of a firm to deal with rivals, meaning here to create more interoperability with competitors. Both of those principles make the DOJ case a tough one.
This should be a great case. The DOJ complaint wants to analogize the case to its successful 1998 Microsoft case, and, indeed, pitches Microsoft as the case that made possible Apple’s eventual success. There is another tech parallel that the DOJ may be less eager to embrace: its 1969 lawsuit against IBM. That case was focused on the way that IBM bundled together hardware, software and services, another tightly integrated system that the government wanted to pry apart. The government dismissed the case 13 years later as “without merit,” though to be fair to the government, the computer industry had changed in the meantime and IBM had done some unbundling “voluntarily” early in the case. Apple is being dragged into an unbundled world in Europe under the Digital Markets Act, but my best guess is that Apple will fight in this case to preserve what it sees as sitting at the very core of Apple.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
