The DoJ’s Apple suit and ’performance smartphones’

The Justice Department, along with 16 states and the District of Columbia, filed an antitrust lawsuit against Apple yesterday, alleging that the company engineered restrictions and operability obstructions across its ecosystem in a purposeful attempt to suppress competition. The lawsuit had been anticipated for some time and follows an adverse judgment in an EU antitrust case earlier this month that resulted in a roughly $2BN fine against Apple.

The lawsuit opens with a sweeping condemnation of Apple’s practices that hints at many of the competition-related issues that have echoed thunderously in recent years related to alternative app store payments, alternative app stores, sideloading, alternative browser engines, preferential privacy policies, etc.:

This case is about freeing smartphone markets from Apple’s anticompetitive and exclusionary conduct and restoring competition to lower smartphone prices for consumers, reducing fees for developers, and preserving innovation for the future.

But the actual substance of the suit is yoked to five specific examples that haven’t, traditionally, been the focus of widespread developer scorn:

• Apple has prevented “superapps,” or platforms for “mini-programs,” from being distributed in the App Store;
• Apple has prevented cloud gaming platforms from being distributed in the App Store;
• Apple has deliberately degraded the cross-platform messaging experience;
• Apple limits the functionality of smartwatches from rival brands on the iPhone and doesn’t make the Apple Watch compatible with rival brands’ smartphones;
• Apple prevents third-party digital wallets from implementing tap-to-pay functionality.

The suit identifies two relevant markets: “performance smartphones,” or high-end smartphones, and smartphones more broadly. The lawsuit notes that Apple estimates its market share of the performance smartphone market in the United States to be over 70%, and the suit determines that Apple’s revenue share of the broader smartphone market is more than 65%. These are peculiar lenses through which to view the markets in which the iPhone competes. The suit’s focus on Apple’s dominance in the premium end of the smartphone segment may ultimately work against it: the consumers who pay for premium hardware also expect premium software experiences. Ultimately, the specific behaviors highlighted by the complaint seem to exist at the margins of Apple’s core business to the extent that any remedies that disrupt them are unlikely to materially impact Apple’s market position.

For instance, the suit defines a super app as “an app that can serve as a platform for smaller “mini” programs developed using programming languages such as HTML5 and JavaScript.” Further, the suit notes that Apple’s animosity towards super apps is “based on first-hand experience with enormously
popular super apps in Asia.” But Android dominates in the Asian market: for example, Apple saw just 21% of smartphone shipments in China in Q4 2023, 6% in Southeast Asia in Q3 2023, 25% in South Korea in 2023, and 7.3% in India in Q4 2023 (one exception is Japan, where Apple holds a majority market share). And HTML5 apps tend to perform worse than native apps (Mark Zuckerberg commented in 2012 that the company’s “biggest mistake” to date was publishing HTML5 instead of native apps). Are super apps popular in Asia because lower-end Android phones proliferate there? And if super apps are allowed on iOS, would iPhone users — who are, as the suit notes, predisposed to purchasing premium hardware — adopt them? Given that developers clamor for alternative app stores and not the ability to deploy superapps, is the suppression of superapps a worthy interrogation in an antitrust suit?

The same logic mostly applies to the smartwatch point. Pairing a smartwatch with a smartphone, by definition, requires ownership of a smartphone. The question with this point relates to the subset of iPhone users who would prefer to use a different smartwatch brand than the Apple Watch but can’t because of interoperability issues. Surely this subset exists, but how large is it? Wouldn’t the consumers most likely to purchase the highest-end smartphone also be likely to buy the highest-end smartwatch, even if other brands were as compatible with the companion smartphone? And how many consumers who own Apple Watches would readily switch to other brands of smartphones but for compatibility issues? Scoping the suit to the premium market but ignoring iPhone owners’ preferences for premium products generally seems misguided.

Regarding the other behaviors cited in the complaint:

• Cloud gaming: I’ve questioned why Roblox is allowed to publish a games streaming app in the App Store while no other company can. Apple’s hostility to games streaming apps appears to be a platform control mechanism meant to focus engagement within its hardware. But game streaming is nonetheless possible on iOS through Safari. And all of this is somewhat irrelevant given that Apple updated its App Store Guidelines two months ago to allow apps that feature game streaming, mini-apps, and mini-games. It’s unclear what any remedy related to this issue would accomplish;
• Cross-platform messaging: the complaint refers to the “green bubble” effect of iMessage interoperability with Android devices in a way that assumes some grievous harm that may be difficult to substantiate in this case. Also, Apple committed last year to bringing the same RCS encryption security that exists for iMessage-to-iMessage chats to iMessage-to-Android chats and to improving the quality of media shared in iMessage-to-Android chats. Again, it’s unclear what a remedy related to this objection would accomplish, broadly;
• Third-party digital wallets. Denying third-party wallets access to the NFC chip that allows for tap-to-pay functionality is certainly a credible grievance. But again, what subset of consumers who select the most expensive smartphone option wants to activate a third-party wallet? How meaningfully beneficial has this restriction been for Apple’s iPhone market share? And isn’t the expectation of a premium smartphone that anything related to hardware sensors that process sensitive data is protected against potential abuse?

To be clear: the behaviors identified in the suit represent choice limitations to consumers. They just aren’t very substantial, and it’s curious that they were chosen to validate the case. I’d argue that these tactics played minor roles in growing or supporting Apple’s market position and that the broader design choices that enabled them are justified by the premium paid for the hardware. When consumers actively elect into the ‘performance’ segment of the smartphone market, they likely accept that the “it just works” nature of the hardware may have eliminated some potentially low-performance options for them.

The specific examples provided in the Justice Department’s lawsuit are all fairly trivial, and the remedies proposed wouldn’t substantially diminish Apple’s market position. While some iPhone owners would surely enjoy using third-party wallets or streaming games, those possibilities seem to have been subordinated for those users to the phone’s greater performance allure. The limitations highlighted in the complaint feel inconsequential in light of Apple’s constraints concerning alternative payments, alternative app distribution, and privacy, which have more substantially supported the company’s success in the mobile ecosystem.

But these issues are not consumer-facing, and they are harder to argue on antitrust grounds. I’ve asserted for years that consumers cannot perceive any harm from broken app store discovery. The same is true for alternative payment methods: any reduction in commission through alternative payment systems would almost certainly not be passed on to consumers in the form of lower IAP, subscription, or premium app prices. Apple decreased its year-two subscription commission to 15% in 2016 and instituted the 15% across-the-board commission for small businesses in 2020. I’ve yet to see a case study alleging lower prices as a result. I’ve also vigorously derided Apple’s App Tracking Transparency (ATT) privacy policy as being nakedly self-preferential, but the case for why it ultimately weakens consumer choice and diminishes competition is nuanced and complex, albeit demonstrable.