The DOJ's case against Apple

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0:11This is The Indicator for Planet Money. I'm Adrian Ma. And I'm Waylon Wong. This week, Apple did something that it does every year around this time. It announced a new iPhone. But this year, there are legal clouds hanging over Apple and the iPhone. For one thing, the day after the announcement, the European Union's top court ordered the company to pay about$14 billion in fat taxes to Ireland. That's where Apple's European headquarters are. And here in the U.S., federal regulators have this outstanding lawsuit against Apple for allegedly violating antitrust laws. Today on the show, we're going to focus on that, why the DOJ brought this suit, and why it matters for the millions of people who have a smartphone.

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1:37Unexpected turns can bring new possibilities. With a hundred years of experience navigating ups and downs, Edward Jones can help guide you. Let's find your rich together. Edward Jones, member SIPC. Rebecca Haw Allensworth is a professor at Vanderbilt Law School, where she teaches antitrust law. She says when the Department of Justice initially brought its lawsuit against Apple in March of this year, it didn't just come out of nowhere. The DOJ and the FTC, the enforcers of antitrust under the Biden administration, have been pretty explicit that they want to pursue cases against these big tech monopolies.

2:17And often they're identified as the GAFA, the Google, Amazon, Facebook and Apple. Oh, I actually have not heard that acronym before. Oh, yeah. Well, now we need to call it Gamma, I guess, because Facebook became Meta. Over the past couple of years, federal regulators have sued Google, Amazon, and Facebook's parent company, Meta, for allegedly violating antitrust law. And then I guess they figured, well, we need to complete the set. And so they filed this lawsuit against Apple. Got to collect them all. Yeah. And I say that a little cynically, but I mean, I actually think this suit is not frivolous.

2:51But yeah, I think the idea behind these suits was that tech companies have gotten really powerful. They've stopped innovating as much as we would want them to. And, you know, antitrust can do something about that. In a nutshell, the DOJ accuses Apple of violating the Sherman Antitrust Act by, quote, monopolizing smartphone markets, end quote. And how supposedly has it been doing that? Well, the iPhone has been around since 2007. And ever since it debuted, Apple has designed a whole suite of products and services to work with the iPhone. I'm talking MacBooks, Apple Watches, apps like iMessage, and a whole app store full of games.

3:31The classic metaphor for this carefully curated ecosystem is a walled garden. Yeah, but according to the DOJ's lawsuit, Apple has constructed its garden in such a way that it effectively locks users in. One example it gives has to do with smartwatches. So if you have an Apple Watch, it's designed to really only work with the iPhone. Conversely, if you have a smartwatch made by some other company, like a Fitbit or a Samsung watch, it can work with iPhone, but the DOJ asserts that Apple purposely limits how well those other watches work on the iPhone. They're making it harder to switch. So what we would call this in antitrust is like barriers to entry.

4:14And, you know, if there's something I don't like about the iPhone, it's very, very difficult for me to essentially, it feels like, upend my life and switch ecosystems. That idea that it's hard for consumers to switch fortifies Apple's monopoly power, says the government. And they have actually taken specific steps, according to the government, to make it harder for me to switch. Another way Apple has allegedly made it harder for users to switch has to do with these things many iPhone users might not be familiar with. Super apps and cloud-based gaming apps. Basically, super apps combine multiple functions into one app.

4:54So imagine an app that lets you text, post videos, order food, and transfer money all in one. That sounds delightful because I never want to stop using my smartphone.

5:06You're like, just press a button. It's like, now it's making me french fries. Now it's doing my laundry. This sounds delightful in a sort of dystopian way. But it's not just super apps. The DOJ also points to these cloud-based gaming apps, which let users stream video games to their phones, sort of like you would stream a movie. For both these kinds of apps, the DOJ says Apple has historically stifled their rollout in the App Store. And both of these claims are that consumers, if they really started living not in the Apple ecosystem, but in the ecosystem of these apps, or in the ecosystem of these clouds, that the hardware becomes kind of irrelevant.

5:47Yeah, I mean, think about it. If you could run these sorts of apps on any old phone, you might not shell out$1 ,000 for the latest iPhone. Yeah, I'm going to do it on my rotary phone. That I would love to see. How you play Angry Birds on a rotary phone. Yeah, like five hours later, I did it. I launched one bird. We reached out to Apple. They said basically the DOJ is wrong. They do have super apps like WeChat on iPhone. And when it comes to cloud gaming services, they do have them in the App Store. Although it's worth noting that's a more recent development. Now, one more thing that the DOJ points to as evidence of Apple's allegedly anti-competitive conduct is the fact that text messaging between iPhones and Androids has always been a little wonky.

6:35Like, if you have an iPhone, you know when somebody's texting you from an Android because it appears in like a little green bubble instead of a blue one. Or like the way that when somebody sends you a picture or a video, it looks all shrunken and grainy. Yeah, it's like you never know what the quality is going to be. Yeah. To somebody who's in the Apple ecosystem, Android looks pretty bad. And the idea is that that's an artificial thing that Apple's doing. So to summarize the DOJ's case against Apple... What the DOJ is sort of arguing is that it's one thing if Apple constructed a really beautiful walled garden.

7:10And it says, don't you love it in here? Isn't it great? But in addition, what it's doing in constructing this walled garden is keeping other potentially nice things out. and making stuff outside the garden seem worse than it really is. Exactly. And it's not just about keeping the stuff out, but it's also keeping you in. You know, when it's time for a new phone, it's an opportunity maybe for you to think about getting out of that garden and finding a new one. But if they've built up the walls so high that you're not actually making a real choice, that's antitrust harm right there. Apple says the DOJ is wrong on the facts and the law.

7:47It says the suit will threaten Apple's ability to keep making products that consumers love in a highly competitive smartphone market. Maybe worth noting here that iPhone sales have not been stellar overseas in recent months, especially in China. Well, I saw, didn't the Chinese company reveal this tri-fold phone? I mean, that's pretty cool. I haven't seen anything like that here. Not from Apple. Just saying. Rebecca, for her part, thinks the DOJ has a strong case, but she's hesitant to call it a slam dunk. Do you see any weaknesses in the Department of Justice's case? Oh, yeah. Lots of weaknesses.

8:24One challenge will be proving that all these alleged tactics by Apple translate into actual monopoly power. According to the DOJ, iPhones account for about 65 to 70 percent of the U.S. smartphone market. Is that enough to say that Apple has a monopoly market share? Rebecca says it's debatable. Apple says that number is inflated because the DOJ is basing it on revenue rather than the number of phones. And from Apple's point of view, the better view of its market power is global sales. Worldwide, sales of Android phones far exceed iPhone sales. And iPhones only make up about 20 percent of smartphones.

9:02So both sides of this case are clearly digging in for some protracted litigation. And you've got to wonder, by the end of it, what is the government hoping to accomplish? So we put that question to Jonathan Cantor. He's assistant attorney general who heads up antitrust litigation at the DOJ. I can't speak to the specific lawsuit because that is live litigation. We don't talk about live cases. But I can tell you more broadly that the remedy in an antitrust case really depends on the nature of the violation. And ultimately, our goal is to make sure that we're prying open competition because we believe that when competition is alive and well, it doesn't just make the smaller companies challenging the monopoly better.

9:47The competitive spirit is what drives innovation. In the case of U.S. versus Apple, it could take a very long time before we see a final resolution. Long enough even that we might sooner see another iPhone 17 or 18. Or a 19. Or a 20. Should we just keep counting? Look at us counting higher and higher. This episode was produced by Cooper Katz McKim with engineering by Neil Rauch. It was fact-checked by Sierra Juarez. Cake and Cannon edits the show and The Indicators production of NPR.

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