USA vs Apple: the 27 spiciest bits in the Apple antitrust lawsuit

Apple antitrust: this is a big one … an antitrust USA vs Apple lawsuit.

I’m not going to handicap the likely result, but regardless of whether Apple wins or the U.S. Department of Justice wins, Apple is going to be significantly preoccupied with this massive case for years to come. And, Apple will be looking over its shoulder every time it makes decisions about the App Store, app guidelines, payments, commissions, and rules for third-party apps.

Plus, Apple is fighting a 2-front war: the EU’s Digital Markets Act on one hand, and this U.S. antitrust lawsuit on the other hand. 

That’s a massive burden on innovation, but it should be good for third party apps.

But what is the DOJ alleging in this lawsuit?

Well, the lawsuit against Apple is 88 pages long and over 22,000 words. That’s long, and most of it is pretty boring. The good news is that I’ve read it so you don’t have to, and I’ve summarized the most interesting bits so you don’t have to. An important note: at the moment these are all allegations, and have yet to be proved in a court of law.

1. Apple has “shapeshifting rules”

The U.S. Department of Justice alleges that Apple changes the rules as needed to reinforce and entrench its own market position.

“Rather than respond to competitive threats by offering lower smartphone prices to consumers or better monetization for developers, Apple would meet competitive threats by imposing a series of shapeshifting rules and restrictions in its App Store guidelines and developer agreements that would allow Apple to extract higher fees, thwart innovation, offer a less secure or degraded user experience, and throttle competitive alternatives.”

Examples the DOJ gives: super apps, text messaging, smartwatches, and digital wallets.

“Apple has used its control over app creation, including its technical and contractual control over API access, to effectively block third-party developers from creating digital wallets on the iPhone with tap-to- pay functionality, which is an important feature of a digital wallet for smartphones. As a result, Apple maintains complete control over how users make tap-to-pay payments with their iPhone.”

2. This is not just about smartphones

The DOJ says Apple’s behavior isn’t just about smartphones: it’s about entire industries that are shifting to mobile but are impacted by “Apple’s anticompetitive and exclusionary conduct.”

That ranges from fintech — where Apple has dabbled with the Apple Card and the Apple Wallet — to fitness where Apple offers Apple Fitness+ as part of its Apple One subscription, to news where Apple has News+, and more:

“Critically, Apple’s anticompetitive conduct not only limits competition in the smartphone market, but also reverberates through the industries that are affected by these restrictions, including financial services, fitness, gaming, social media, news media, entertainment, and more.”

3. It’s not just the federal government

15 states and the District of Columbia are joining the federal Department of Justice in this case:

• Arizona
• California
• Connecticut
• Maine
• Michigan
• Minnesota
• New Hampshire
• New Jersey
• New York
• North Dakota
• Oklahoma
• Oregon
• Tennessee
• Vermont
• Wisconsin

What that means is that any eventual settlement will be significantly more costly. Plus, of course, if there is a significant monetary penalty that the states share in, any states not participating in this action will then try to win their pound of flesh too.

4. Apple is more dominant than Android and Google BECAUSE of developers

The lawsuit says Apple is more dominant than the globally much bigger Android operating system and its main maker and beneficiary, Google.

The reason, the DOJ says, is third-party developers:

“Over more than 15 years, Apple has built and sustained the most dominant smartphone platform and ecosystem in the United States by attracting third-party developers of all kinds to create apps that users could download on their smartphones through a digital storefront called the App Store.”

The problem, according to the DOJ, is that as Apple’s power grew, so did its leverage over those third-party developers. 

5. Fees: Apple Wallet, Apple Pay, Apple Card

Apple charges a per-transaction fee to credit card companies that want to put their credit cards into Apple Wallet and enable tap-to-pay, which is why some credit card companies have been slow to integrate with the technology.

“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.”

• Apple Pay is paying with your phone/watch
• Apple Wallet is where credit cards and tickets are stored
• Apple Card — only available in the U.S. — is an Apple-owned credit card, which lives in Apple Wallet

The fee for Apple Pay, according to the DOJ, is .15% Over time, this adds up: the DOJ cites a U.S. Consumer Financial Protection Bureau report that estimates Apple Pay facilitated nearly $200 billion in transactions in the United States in 2022, and growing.

“Apple has charged issuing banks 15 basis points (0.15 percent) for each credit card transaction mediated by Apple Pay.”

Samsung, on the other hand, does not charge this fee.

6. DOJ: Apple inhibits competition

Apple inhibits competition by blocking technologies, the Apple antitrust DOJ filing says.

“Apple reduces competition in the markets for performance smartphones and smartphones generally. It does this by delaying, degrading, or outright blocking technologies that would increase competition in the smartphone markets by decreasing barriers to switching to another smartphone.”

NFC comes to mind: for years only Apple apps could use it, which made it challenging for other apps to create authentication protocols, especially in the payments space.

As the DOJ notes: Apple is being forced to open up NFC in Europe.

7. Getting specific: 5 examples of consumer harm, according to the U.S. government

The lawsuit alleges 5 specific examples of consumer harm that it says Apple is causing:

1. Super apps like WeChat are limited
   Super apps would need to be able to allow installation of mini apps, which Apple has suppressed for years
2. Cloud streaming apps have been blocked
   Although recently loosened, Apple’s rules around cloud streaming apps have been restrictive
3. Messaging apps lack access
   Apple makes other companies’ messaging apps on the iPhone worse, the DOJ says, “by prohibiting third-party apps from sending or receiving carrier-based messages”
4. Smartwatches are second-class citizens
   Third-party smartwatches can’t connect to iPhones as first-class citizens with full access to notifications, etc.
5. Digital wallets are harder to implement
   “Apple has denied users access to digital wallets,” the DOJ says, “that would have provided a wide variety of enhanced features and denied digital wallet developers—often banks—the opportunity to provide advanced digital payments services to their own customers”

Just one example for messaging apps:

“Apple designates as ‘private’ the APIs needed to send Short Message Service, or SMS, text messages, which is a protocol used by mobile carriers since the early 1990s to allow users to send basic text messages to other mobile phone numbers using their own mobile phone numbers. Developers have no technical means to access these private APIs, but even if they did, doing so would breach their developer agreement with Apple, and therefore put the developer at risk of losing the ability to distribute apps through the App Store.”

And another for super apps:

“Super apps also reduce user dependence on the iPhone, including the iOS operating system and Apple’s App Store. This is because a super app is a kind of middleware that can host apps, services, and experiences without requiring developers to use the iPhone’s APIs or code.”

Specifically:

“Apple recognizes that super apps with mini programs would threaten its monopoly. As one Apple manager put it, allowing super apps to become ‘the main gateway where people play games, book a car, make payments, etc.’ would ‘“let the barbarians in at the gate.’ Why? Because when a super app offers popular mini programs, ‘iOS stickiness goes down.’”

And on cloud streaming:

“In Apple’s own words, it feared a world where ‘all that matters is who has the cheapest hardware’ and consumers could ‘buy[] a [expletive] Android for 25 bux at a garage sale and . . . have a solid cloud computing device’ that ‘works fine.’”

8. Microsoft didn’t act like Apple

If you remember the early days of iTunes and the iTunes Music Store, which Apple also released for Windows, the DOJ notes that “Microsoft did not charge Apple a 30% fee for each song downloaded from Apple’s iTunes store.”

Apple will say this is very different, of course, given that the iTunes Music Store was a desktop app, not a mobile app.

As smartphones get more and more capable, however, it’s harder to make the distinction that they are not computers … even though the iPhone in particular has been built as a closed appliance. Apple will say that is for the sake of security, and they’re right. Others, including the DOJ, will add that it’s also for Apple’s lock-in advantage.

9. iPhones are too expensive

This is a novel one for me.

The DOJ says that Apple prices its phones too high … higher than it could if it did not engage in anticompetitive behavior, I suppose.

“Apple inflates the price for buying and using iPhones while preventing the development of features like alternative app stores, innovative super apps, cloud-streaming games, and secure texting.”

10. Apple harms innovation in specific app verticals, the DOJ says

This seems more plausible:

“Apple’s smartphone monopoly means that it is not economically viable to invest in building some apps, like digital wallets, because they cannot reach iPhone users.”

There are just some apps you’re not going to build because Apple already provides a great experience for users, and winning against free, or included, or built-in is hard.

That has an overall harm on the market, the DOJ says:

“What’s more, Apple itself has less incentive to innovate because it has insulated itself from competition.”

Two pieces of evidence the DOJ supplies for this:

• Apple has spent 2X the cash on stock buybacks as it has on R&D ($30 billion to $77 billion)
• An Apple executive argued the company did not need to innovate hard, as many features were already “good enough”

11. Apple’s privacy story is a self-serving “cloak”

This will be interesting for marketers who have lost signal due to ATT and SKAdNetwork: the DOJ says Apple’s privacy branding is self-serving, and Apple’s own behavior compromises user privacy and security.

“Apple deploys privacy and security justifications as an elastic shield that can stretch or contract to serve Apple’s financial and business interests.”

Ouch!

And:

“Apple selectively compromises privacy and security interests when doing so is in Apple’s own financial interest—such as degrading the security of text messages, offering governments and certain companies the chance to access more private and secure versions of app stores, or accepting billions of dollars each year for choosing Google as its default search engine when more private options are available.”

12. Apple market share by revenue: 70%

We’ve seen this before — though honestly, around 2 years ago globally it was at 80% — but Apple does capture a massive share of the revenues available in the global smartphone market.

Apple’s argument that it is not a monopoly has always rested on the existence of the vibrant and massive Android community. The DOJ is saying that this hardly matters when the lion’s share of the profits in the space are hoovered up by iPhone.

I think this will be a hard point to make to a judge or jury. Higher prices are hardly illegal.

Interestingly, the DOJ invents a new metric: “performance smartphones.”

“Apple’s market shares—over 70 percent of the performance smartphone market and over 65 percent of the broader smartphone market—likely understate its monopoly power today.”

13. Market share among the young

In what I think is another weak point, the DOJ says that young people (and rich people) are more likely to want iPhones:

“For example, one- third of all iPhone users in the United States were born after 1996, as compared to just 10 percent for Samsung, Apple’s closest smartphone competitor. Surveys show that as many as 88 percent of U.S. teenagers expect to purchase an iPhone for their next smartphone.”

Sure it is not illegal to be trendy and desirable?

14. Apple is an antitrust beneficiary

Several times throughout the document, the DOJ makes the point that Apple is an antitrust beneficiary in terms of what the DOJ did to Microsoft during Apple’s “beleaguered” days of MacOS vs Windows.

“For example, the iPod did not achieve widespread adoption until Apple developed a cross- platform version of the iPod and iTunes for Microsoft’s Windows operating system, at the time the dominant operating system for personal computers. In the absence of the consent decree in United States v. Microsoft, it would have been more difficult for Apple to achieve this success and ultimately launch the iPhone.”

The implicit message: what’s good for the goose is good for the gander.

The DOJ weakens its case here, in my very humble opinion, however, by suggesting that antitrust laws that forced Microsoft to open APIs for third-party media players were a major factor in making the iPod a success:

“In the first two years after launching the iPod, Apple sold a few hundred thousand devices. The year after launching a Windows-compatible version of iTunes and gaining access to millions more customers, Apple sold millions of devices.”

In reality, as a journalist covering Apple during those days, the elegance and usability of the iPod drove its own popularity, and took people away from Windows to the Mac, helping revive Apple’s core business at the time.

That said, this is an interesting argument:

“But after launching the iPhone, Apple began stifling the development of cross-platform technologies on the iPhone, just as Microsoft tried to stifle cross-platform technologies on Windows.”

15. The App Store is Apple’s tool for “monopoly power”

Clearly, the App Store is the choke point through which Apple controls its iOS ecosystem. The DOJ says that constitutes monopoly power.

“Limiting distribution to the Apple App Store enables Apple to exert monopoly power over developers by imposing contractual restrictions and rules that limit the behavior of non-Apple apps and services. Specifically, Apple sets the conditions for apps it allows on the Apple App Store through its App Store Review Guidelines.”

That’s going to be a key point of contention in the trial.

This part is truly ouch, though:

“Apple selectively exercises that discretion to its own benefit, deviating from or changing its guidelines when it suits Apple’s interests and allowing Apple executives to control app reviews and decide whether to approve individual apps or updates. Apple often enforces its App Store rules arbitrarily. And it frequently uses App Store rules and restrictions to penalize and restrict developers that take advantage of technologies that threaten to disrupt, disintermediate, compete with, or erode Apple’s monopoly power.”

I suspect there will be no shortage of third-party developers who will testify to this, led by Epic Games.

16. Unfair distribution of private APIs

The DOJ says that Apple keeps private APIs for itself — hardly a shock — but also says it selectively releases those for just some third-party apps.

“Apple selectively designates APIs as public or private to benefit Apple, limiting the functionality developers can offer to iPhone users even when the same functionality is available in Apple’s own apps, or even select third-party apps.”

17. iPhone is a platform, not an appliance

To win, the DOJ needs to prove that smartphones are a computing platform, rather than a limited appliance which is carefully controlled for safety and security.

“Smartphone platforms are very different from other platforms, like landline telephone networks, whose value-adding features were built primarily by the platform operator and which were only opened to third parties when the platform operator was required to do so by regulation. When a third-party developer for the iPhone creates a valuable new feature, consumers benefit and consumer demand goes up for Apple’s products, increasing the economic value of the iPhone to Apple.”

According to the DOJ, Apple artificially limits its platform for monopoly reasons.

“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.”

18. DOJ: Apple’s maintenance of monopoly power is unlawful

The DOJ says apple maintains its monopoly power in 3 distinct ways:

1. App Store guidelines
   “Apple exercises its control over app distribution and app creation to dictate how developers innovate for the iPhone, enforcing rules and contractual restrictions that stop or delay developers from innovating in ways that threaten Apple’s power.”
2. Switching costs
   “Apple increases the cost and friction of switching from the iPhone to another smartphone.”
3. Monopoly rents and fees
   “Apple uses these restrictions to extract monopoly rents from third parties in a variety of ways, including app fees and revenue-share requirements. For most of the last 15 years, Apple collected a tax in the form of a 30 percent commission on the price of any app downloaded from the App Store, a 30 percent tax on in-app purchases, and fees to access the tools needed to develop iPhone native apps in the first place.”

19. Apple Search Ads in the cross-hairs

Interestingly, Apple Search Ads has not escaped the DOJ’s notice.

In one place, the DOJ says that Apple “generates extraordinary profits” through “advertisements within the App Store” among other things.

In another, the DOJ says that charging developers for users to find their apps and selling keywords linked to one app to another app willing to pay is problematic.

“Apple also generates substantial and increasing revenue by charging developers to help users find their apps in the App Store—something that, for years, Apple told developers was part of the reason they paid a 30 percent tax in the first place. For example, Apple will sell keyword searches for an app to someone other than the owner of the app. Apple is able to command these rents from companies of all sizes, including some of the largest and most sophisticated companies in the world.” 

20. DOJ: Apple slowed its own innovation

The DOJ alleges that Apple slowed down its own pace of innovation in a way that “extracted more revenue and profit from its existing customers through subscriptions, advertising, and cloud services.”

One specific example the DOJ says is evidence of this is super apps.

“Apple did not respond to the risk that super apps might disrupt its monopoly by innovating. Instead, Apple exerted its control over app distribution to stifle others’ innovation. Apple created, strategically broadened, and aggressively enforced its App Store Guidelines to effectively block apps from hosting mini programs.”

A downside for the DOJ: WeChat is available on the iOS App Store, no?

I just checked the WeChat listing on the App Store, and listed among its features is this:

“MINI PROGRAMS: Countless third-party services all within the WeChat app that don’t require additional installation, saving you precious phone storage and time.”

However, the DOJ says:

“Apple blocked mini programs from accessing the APIs needed to implement Apple’s in-app payment (IAP) system—even if developers were willing to pay Apple’s monopoly tax. Similarly, Apple blocked developers’ ability to use in-app payment methods other than directly using IAP. For instance, super apps could create a virtual currency for consumers to use in mini programs, but Apple blocked this too.”

Another example: cloud streaming for games and apps.

One downside for the DOJ here: it’s not clear that consumers have really gravitated towards any of the big cloud streaming initiatives that the tech giants and others have released.

21. Cross-messaging to Android: second-class citizens

Many have talked about the tyranny of the green bubble in Apple iMessage, and how it looks when Android users enter chats.

The DOJ says:

“if an iPhone user messages a non-iPhone user in Apple Messages—the default messaging app on an iPhone—then the text appears to the iPhone user as a green bubble and incorporates limited functionality: the conversation is not encrypted, videos are pixelated and grainy, and users cannot edit messages or see typing indicators. This signals to users that rival smartphones are lower quality because the experience of messaging friends and family who do not own iPhones is worse—even though Apple, not the rival smartphone, is the cause of that degraded user experience. Many non-iPhone users also experience social stigma, exclusion, and blame for “breaking” chats where other participants own iPhones.”

This especially impacts teenagers, the DOJ says, citing that iPhone’s share is 85% in that demographic.

22. Apple uses a moat philosophy to maintain its monopoly, the DOJ says

Some examples the DOJ provides of technologies or sectors that it says can’t compete fairly on iOS:

• third-party location trackable devices
• third-party, cross-platform video communications apps
• third-party iOS web browsers
• eSIM technology
• restrictions in sales channel
• third-party voice and AI assistants

23. DOJ: Apple’s own subscription services compete unfairly

Apple now offers subscriptions in “news, games, video, music, cloud storage, and fitness,” the DOJ notes, which “could be used to keep users tethered to the platform,” and can increase switching costs.

The entire Apple ecosystem is part of the problem, according to the DOJ:

“Apple has countless products and services—AirPods, iPads, Music, Apple TV, photos, maps, iTunes, CarPlay, AirDrop, Apple Card, and Cash. These provide future avenues for Apple to engage in anticompetitive conduct and the ability to circumvent remedies. Appropriate forward-looking remedies are necessary to ensure that Apple cannot use these products and services to further entrench its monopoly power.”

One problem: for those inside the Apple ecosystem, there’s significant consumer benefit. Ease of use, consolidation, simplicity … so pulling it all apart would result in massive consumer harm.

24. Charging commission on in-app purchases on the web

The DOJ is not impressed with Apple attempts to continue to charge IAP commissions on purchases made elsewhere.

“Apple was recently ordered to stop blocking link-outs by third parties to their websites where users could buy the third party’s product cheaper. In response, Apple reportedly allowed link-outs to websites but now charges for purchases made on the web even if they are not an immediate result of a click from a link in a native iPhone app.”

When 1 road is closed, the DOJ notes, Apple finds “new roads to the same or worse ends.”

25. CarPlay wants to take over

Many manufacturers have taken CarPlay out over the past year or so, but it remains a popular and desirable feature for many consumers. (As a Tesla owner, I would appreciate CarPlay in my car, but cannot get it.)

A key reason:

“After leveraging its smartphone dominance to car infotainment systems, Apple has told automakers that the next generation of Apple CarPlay will take over all of the screens, sensors, and gauges in a car, forcing users to experience driving as an iPhone-centric experience if they want to use any of the features provided by CarPlay.”

26. Multiple app stores

The DOJ has not overlooked the inability of competitors to offer additional app stores for iPhone and iPad.

“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.”

27. Privacy and security are not the reasons, the DOJ says

Apple’s response to much of this, of course, will be that the way the iOS ecosystem has been engineered is to keep out malware and bad actors, and there’s a lot of truth to that.

Not enough, however, in the eyes of the DOJ:

“Privacy, security, and other alleged countervailing factors do not justify Apple’s anticompetitive conduct  … there are no valid, procompetitive benefits of Apple’s exclusionary conduct that would outweigh its anticompetitive effects. Apple’s moat building has not resulted in lower prices, higher output, improved innovation, or a better user experience for smartphone users.”

The evidence, for the DOJ, is Apple own desktop and laptop computers:

“As a point of comparison, Apple does not engage in such conduct on its Mac laptops and computers. It gives developers the freedom to distribute software directly to consumers on Mac without going through an Apple-controlled app store and without paying Apple app store fees.”

In fact, in fintech, Apple’s moves result in less privacy and security, according to the DOJ:

“When an iPhone user provisions a credit or debit card into Apple Wallet, Apple intervenes in a process that could otherwise occur directly between the user and card issuer, introducing an additional point of failure for privacy and security.”

Also, text messages sent to Androids are unencrypted, unless iMessage messages.

Ultimately, the DOJ says, this is all self-serving:

“Ultimately, Apple chooses to make the iPhone private and secure when doing so benefits Apple; Apple chooses alternative courses when those courses help Apple protect its monopoly power.”

Summing it all up

We’re all going to need to take some time to digest everything here in this Apple antitrust lawsuit.

While many feel the DOJ’s efforts are not likely to be successful, the fact that this lawsuit has been launched is likely going to be the catalyst for significant change on iOS in the years and decades to come.

I personally think there’s a way for Apple to adopt radical changes that will save it from the storm of legislation and lawsuits it is now facing in Europe, the United States, and elsewhere, without significant financial and platform downside.

But more on that in the week to come.