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The Department of Justice sued Apple
on Thursday, saying its iPhone ecosystem is a monopoly that drove its “astronomical valuation” at the expense of consumers, developers and rival phone makers.

The government has not ruled out breaking up one of the largest companies
in the world, with a Justice Department official saying on a briefing call
that structural relief was on the table if the U.S. were to win.

The lawsuit claims Apple’s anti-competitive practices extend beyond the
iPhone and Apple Watch businesses, citing Apple’s advertising, browser, FaceTime and news offerings.

“Each step in Apple’s course of conduct built and reinforced the moat
around its smartphone monopoly,” according to the suit, filed by the DOJ
and 16 attorneys general in New Jersey federal court.

Apple shares fell more than 4% during trading Thursday. A breakup of Apple
if successful would be one of only a handful of breakups under the Sherman
Act. The DOJ has considered using it in other antitrust cases, but has not
done so since the breakup of the Bell System in 1982.

The Justice Department said in a release that to keep consumers buying
iPhones, Apple moved to block cross-platform messaging apps, limited third-party wallet and smartwatch compatibility, and disrupted non-App
Store programs and cloud streaming services.

The challenge represents a significant risk to Apple’s walled-garden
business model. The company says that complying with regulations costs it money, could prevent it from introducing new products or services, and
could hurt customer demand.

The lawsuit could force Apple to make changes in some of its most valuable businesses: The iPhone, in which Apple reported more than $200 billion in
sales in 2023, the Apple Watch, part of the company’s $40 billion
wearables business, and its profitable services line, which reported $85 billion in revenue.

U.S. Attorney General Merrick Garland said at a news conference that the Supreme Court defines monopoly power as “the power to control prices or
exclude competition.”

“As set out in our complaint, Apple has that power in the smartphone
market,” Garland said. “If left unchallenged. Apple will only continue to strengthen its smartphone monopoly.”

Apple said in a statement that it disagreed with the premise of the
lawsuit and that it would defend against it.

“This lawsuit threatens who we are and the principles that set Apple
products apart in fiercely competitive markets. If successful, it would
hinder our ability to create the kind of technology people expect from Apple—where hardware, software, and services intersect,” an Apple
spokesperson told CNBC. “It would also set a dangerous precedent,
empowering government to take a heavy hand in designing people’s
technology.”

The lawsuit follows years of investigations into Apple’s business
practices and two prior DOJ cases against Apple: One over e-book prices
and another over allegations that it colluded with other technology
companies to depress salaries.

“This anticompetitive behavior is designed to maintain Apple’s monopoly
power while extracting as much revenue as possible,” the complaint said.

iMessage, Apple Watch and cloud gaming
The complaint highlights comments from CEO Tim Cook and other executives.
Some users have asked Apple to improve Android-to-iPhone messaging.
Developers have gone as far as creating apps that can circumvent the
platform limitations, only to be shut down by Apple.

Prosecutors highlighted one exchange between Cook and a consumer.

“Not to make it personal but I can’t send my mom certain videos,” the
complaint says one user told Cook, referring to a 2022 interview at a Vox
Media event.

“Buy your mom an iPhone,” Cook responded.

The DOJ is also focusing on Apple’s smartwatch, Apple Watch, saying the
company designed it to only work with iPhones, and not Android devices.
The company’s decision means that “users who purchase the Apple Watch face substantial out-of-pocket costs if they do not keep buying iPhones,”
according to the complaint.

The Justice Department said Apple has fought cloud streaming services on
its App Store platform, blocking consumer access to high-quality video
games on iPhones, echoing complaints from Microsoft and Facebook parent
Meta.

Garland said the DOJ is also looking at changing policies around Apple
Wallet, the company’s app for phone-based credit cards and payments.

“When an iPhone user puts a credit or debit card in Apple Wallet, Apple
inserts itself into the process that would otherwise occur directly
between the user and the card issuer,” Garland said.

Apple has faced several significant antitrust challenges more recently,
largely focused on its control over the iPhone App Store. It mostly won in
a civil suit against Epic Games in 2021, although it made concessions
during the trial and had to make some changes to its policies under
California law.

“Today’s lawsuit seeks to hold Apple accountable and ensure it cannot
deploy the same, unlawful playbook in other vital markets,” the U.S.
government said in the release.

Jonathan Kanter, assistant attorney general for antitrust, argued during
the Thursday news conference that Apple benefited from previous DOJ
antitrust actions against Microsoft.

“Apple itself was a significant beneficiary of that case,” Kanter said.
“And the remedy paved the way for Apple to launch iTunes, iPod, eventually
the iPhone, free from anti-competitive restrictions, excessive fees and retaliation.”

The company is currently jockeying with the European Commission over
whether it’s complying with the new EU Digital Markets Act, which forces
Apple to open up the iPhone app store to rivals such as Microsoft or Epic Games. Apple plans to charge big companies that eschew its app store 50
cents per download.

Apple was fined $2 billion by the EU over a dispute with Spotify
about whether the music streaming service can link to its website and
account system inside of its app.

Apple had 64% of the market share for U.S. smartphones in the last quarter
of 2023, versus 18% for Samsung, according to Counterpoint Research.

Apple isn’t the only big tech company facing government scrutiny. The DOJ
filed an antitrust case against Google in 2020 over its dominant search position and in another year over its advertising business. The DOJ also famously sued Microsoft in the 1990s, eventually forcing it to allow users
to unbundle the Internet Explorer browser from the Windows operating
system.

Correction: This story has been updated to correct that Apple had 64% of
the market share for U.S. smartphones in the last quarter of 2023,
according to Counterpoint Research.

https://www.cnbc.com/2024/03/21/doj-sues-apple-over-iphone-monopoly.html

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