At the heart of the government’s lawsuit against Apple is if the tech company’s practices of tying and refusing to deal truly enhance the performance and security of the iPhone and its ancillary services. The complaint indicates that the outcome of the case will be determined by the consumer welfare standard, writes Herbert Hovenkamp.
Also, read analysis on the Apple lawsuit from Randy Picker, Fiona Scott Morton, and Maurice Stucke.
The government’s monopolization complaint against Apple challenges iPhone designs that exclude some applications from competitors. These include apps that compete with iMessaging, the Apple Watch, Apple’s wallet, cloud storage, and others. The complaint does not rely on the more robust hypothetical monopolist test (HMT) for market definition; rather it relies on factors that are not well designed for identifying monopoly. It alleges in paragraph 5, that Apple earns high margins on iPhone sales, more than double versus rivals in the industry. The proper baseline for applying the HMT in monopolization cases is the competitive price. That claim, if proven, suggests that Apple’s market power is significant.
What is less clear is whether “performance smartphones”—which the lawsuit identifies as higher-end devices compared to cheaper and less powerful “entry-level” smartphones, such as some models of the Xiaomi Redmi—are also a relevant market (paragraph 165). The allegations are that industry participants recognize them as distinctive, but say nothing about differential margins. The complaint then alleges that Apple’s market share exceeds 70% in the “performance” market and 65% of the broader smartphone market in the United States. Worldwide, the numbers look much different. Apple’s share is under 30% and Android’s exceeds 70%. In the U.S., a wealthier country, a higher percentage of people choose the iPhone. That may be a problem for the government if the iPhone/Android balance is a simple exercise of unconstrained consumer preference.
The complaint alleges that “Apple’s moat building has not resulted in lower prices, higher output, improved innovation, or a better user experience.” (paragraph 141, emphasis added). That is about as clear a statement of a consumer welfare goal as one can find anywhere, even though the government has repudiated it in favor of a mushier “competitive process” goal. When you want to get the job done you need a goal that actually measures something, and this statement from the complaint provides a metric. Further, it suggests that the government intends to take on Apple’s quality/security defense directly by proving that Apple’s exclusions do not produce a “better user experience.” As an antitrust goal, that is a measure of output, which can assess either quantity or quality. The metrics of consumer welfare are apparently back.
The iPhone is a platform used by nearly 100 million Americans, not only to make calls but also as a window into commerce. One important question is how arbitrary its owner can be in choosing the businesses who operate on it. Apple has developed its own ecosystem of complementary products that is less accessible to rivals than the government thinks it should be. The complaint is couched in the antitrust language of refusal to deal, but that legal doctrine faces formidable hurdles. One is a requirement that the defendant reneged on a previous voluntary course of dealing. These rules are outmoded for dominated digital networks that have multiple firms as participants. The participants in such networks need to cooperate in order to achieve their purpose, and antitrust is relevant when unreasonable restrictions impede that in a way that furthers monopoly. A better rule would condemn unjustified refusals that create or prolong dominance in the secondary market. Nevertheless, only the Supreme Court can change the existing rules.
An approach encumbered with fewer restrictive legal rules would treat Apple’s exclusion of competing apps as technological ties, or “tech ties.” These are product designs that tie a primary product (in this case, the iPhone) and a secondary product (e.g., smartwatches) together, excluding or disfavoring rivals in the secondary market. Tech tying by a monopolist in a primary market can be unlawful when it injures rivals in a secondary market without providing any significant benefit. It does not require previous voluntary dealing. The point of the offense is the creation of monopoly for a complementary product to the defendant’s platform.
Both refusals to deal and tech ties face Apple’s certain defense that its closed system improves performance and security. Suppose a court found no improvement and that their only function is to exclude rivals. Even the relatively conservative Federal Circuit Court has acknowledged liability when the defendant redesigned its product simply to make generic complements incompatible. Keurig met the same fate and paid a large class action settlement when it introduced a useless redesign of its coffee making system that did no more than make it impossible to use rivals’ coffee pods, or K-Cups.
Fact finding will be needed for each of Apple’s challenged practices. Suppose one or more of them improve performance and security and no less restrictive alternative is adequate. In that case a liability finding plus an injunction would degrade iPhone performance. Courts have been reluctant to oblige, with the Ninth Circuit stating categorically that there is “no room” for “balancing the benefits or worth of a product improvement against its anticompetitive effects.” In Epic Games the U.S. government submitted an amicus brief arguing in favor of such balancing. Otherwise, it argued, “an egregious restraint with a minor procompetitive effect would be allowed to continue.” The Ninth Circuit declined. The Eighth Circuit has also concluded that an actual product improvement kills the antitrust claim. The exclusion of non-App Store sales at issue in Epic Games differed from the practices the government alleges here, perhaps warranting a different outcome. The Third Circuit (New Jersey), in which the Apple case was filed, has not spoken to this particular issue, although it has been more generous to plaintiffs in cases of exclusionary sales by dominant firms.
Creation of an appropriate remedy confronts the same issues concerning performance and security. It would require a judicially directed redesign of iPhone features in such a way that the user experience, and not simply the profits of rivals, is improved. The federal courts’ remedial powers here are very broad, and it would be easy to come up with a remedy that protects rivals— for example, by forcing Apple to admit everyone without review. But a remedy that actually benefits users is a much taller order.
The government’s case will face substantial evidence that the iPhone system is indeed superior in performance and security, and that its relatively closed ecosystem is critical to that. What remains to be proven is the extent to which the particular restrictions challenged in this complaint make a contribution to this or were just anticompetitive overreaching. Even if Apple’s more closed system delivers improved performance and security, it is not necessarily true that each individual restriction contributes to that result.
If the challenged practices contribute to better performance, however, then the principal effect of a decree granting the requested relief would be to degrade the iPhone’s performance and reduce the differences between Apple and Android devices. Under the status quo, both systems are readily available. Users who want better performance and more security simply pay more. That looks more like product differentiation rather than monopoly.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
