Apple sued in a landmark iPhone monopoly lawsuit

Washington (CNN) — The US Justice Department and more than a dozen states filed a blockbuster antitrust lawsuit against Apple on Thursday, accusing the giant company of illegally monopolizing the smartphone market. It’s the largest in a recent string of Big Tech companies to face antitrust complaints from the US government, which is cracking down on the massive industry whose power has gone largely unchecked over the past several decades.

The long-anticipated lawsuit comes after years of allegations by critics that Apple has harmed competition with restrictive app store terms, high fees and its “walled-garden” approach to its hardware and software: Apple famously makes its tech easy to use, but it achieves that by tightly controlling - and in some cases, restricting - how third-party companies can interact with the tech behemoth’s products and services. In some cases, Apple may give its own products better access and features than its competitors. The company said it denied the lawsuit’s allegations and would fight them.

“Apple undermines apps, products, and services that would otherwise make users less reliant on the iPhone,” the Justice Department said in a press release. “Apple exercises its monopoly power to extract more money from consumers, developers, content creators, artists, publishers, small businesses, and merchants, among others.”

For example, Apple allows iPhone customers to send high-quality photos and videos seamlessly to one another, but multimedia texts to Android phones are slower and grainy. The company late last year relented and agreed to improve the quality standard it uses to interact with Android phones via text message – but it still maintains those messages in green bubbles, creating a kind of class divide, critics argue.

The company also gives its own products the ability to access certain parts of its hardware that it restricts other companies from using. That unleashes an almost magical experience for how iPhones interact with AirTags, when competitors’ products are far more limited in their capabilities.

This year, European regulations forced Apple to give other companies access to the iPhone’s tap-to-pay hardware chip, enabling the creation of competing digital wallets. But those rules are limited to the European Union.

And Apple maintains a large 30% commission on most sales through its app store – a frequent complaint from companies that try to sell subscriptions, saying Apple’s enormous share of the smartphone market forces them to pay what they argue is an unnecessarily high commission.

“We believe this lawsuit is wrong on the facts and the law, and we will vigorously defend against it,” Apple said in a statement.

Thursday’s suit claims Apple has illegally monopolized smartphone markets by using a complex web of contractual terms that harm everything from text messaging to mobile payments. Among other things, the DOJ says, Apple has used its control over iOS, the iPhone operating system, to block innovative new apps and cloud streaming services from the public; degrade how Android messages appear on iPhones; restricted how competing smartwatches can work with iPhones; and hindered rival payment solutions.

“By stifling these technologies, and many others,” Thursday’s complaint says, “Apple reinforces the moat around its smartphone monopoly not by making its products more attractive to users, but by discouraging innovation that threatens Apple’s smartphone monopoly.”

Apple, in a statement, said the lawsuit would hinder its ability to make the compelling and consumer-friendly technology that have made the company one of the most valuable in the world.

“At Apple, we innovate every day to make technology people love – designing products that work seamlessly together, protect people’s privacy and security, and create a magical experience for our users,” the company said in its statement. “This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets.”

Years of scrutiny

Apple has shrugged off legal challenges and criticism for years that its practices are anticompetitive. Its sterling consumer reputation and a disciplined public relations and legal strategy mirrors the precision in which Apple manufactures and oversees its products.

But the Justice Department’s landmark suit challenges a broad range of Apple’s practices.

The case represents the Biden administration’s latest effort to hold a Big Tech giant accountable under US antitrust law. Apple is the only major tech company the federal government has yet to sue for alleged antitrust violations.

Apple was named in a sprawling House report in 2020 finding that the iPhone maker, along with Meta, Google and Amazon, hold “monopoly power.”

The legal action could weigh on Apple’s stock price that currently values the company at just under $3 trillion and could force changes to policies, business strategies, products and applications by the tech giant. Even divestment of some assets is not out of the question for Apple, the tech company founded by Steve Jobs in the 1970s.

Apple’s (AAPL) stock fell less than 1% Thursday. The lawsuit was widely anticipated.

Along with a pair of ongoing antitrust cases against Google, the DOJ lawsuit against Apple is likely to become a symbol of the Biden administration’s commitment to competition and lowering prices. It will also be a test of how far courts are willing to go to apply decades-old antitrust law to the modern digital economy.

The Apple case may be one of the most closely watched lawsuits brought by Jonathan Kanter, Biden’s top DOJ antitrust official. Kanter, who in private practice once represented rivals to Google including Microsoft and Yelp, is viewed as part of a fresh generation of regulators.

Along with his counterpart at the Federal Trade Commission, Lina Khan, Kanter has argued that the United States has for decades allowed a wave of corporate consolidation and anticompetitive practices that ultimately harmed the public through higher prices, fewer choices or reduced innovation.

Apps vs Apple

To solve Android phone customers’ “green bubble” issue, Eric Migicovsky, a tech entrepreneur, says an app he created, dubbed Beeper Mini, to help Android users message iPhone users without those limitations was quickly shut down by Apple.

“It lasted for a total of three days before Apple started to take swings at us,” Migicovsky said. “Technologically, they worked very hard to take actions to penalize Beeper Mini users by knocking the connection offline or by making it progressively more unreliable.”

Those kind of interactions have made Apple’s app store a focus of antitrust complaints.

Beginning in 2020, Apple fought a highly public court battle against Epic Games, maker of the video game “Fortnite.”

Apple isn’t an illegal monopolist in distributing iOS apps, federal courts have decided in that case, highlighting the difficulty of pinning Apple down on federal antitrust charges. Apple did, however, get penalized for violating a California competition law and altered some of its app store practices in response to a court order.

Those rulings highlight the challenges ahead for the Justice Department, which will need to bring a strong legal theory about how Apple has allegedly harmed competition, legal experts say. The DOJ would also need to prove that the benefits Apple has delivered to consumers don’t outweigh its alleged antitrust violations.

Europe’s bite at Apple

The US government isn’t the only one to pressure Apple to change its business practices. In March, a new European Union law took effect that forces Apple to make significant adjustments.

In a seismic move to comply with the EU’s Digital Markets Act (DMA), Apple said for the first time it would allow users in the trading bloc to download apps from third-party app stores.

But critics including Epic are already accusing Apple of violating the EU law. Just before the DMA took effect, Epic complained to competition authorities that Apple blocked it from launching its own app store on iOS. The European Commission is investigating.

Upstart turned behemoth

Since its early days, Apple has pursued a reputation as an elite, high-design brand. It’s often focused on a premium user experience and design aesthetic, setting its products apart from rivals such as Microsoft and Google. That limited approach worked for years, until a wave of complaints by app developers and consumers drew more attention to the potential downsides of Apple’s restrictiveness.

In the era led by founder Steve Jobs, “Apple was a cultural phenomenon that pitted wingtips against sandals; suits against t-shirts,” said James Bailey, a professor of leadership development at the George Washington University School of Business. “Apple relentlessly innovated. They were always steps ahead of the competition.”

Now, however, Apple’s advances are more “incremental” than earth-shattering, Bailey added. “[CEO Tim] Cook has been focused on financial management and expanding market share.”

“Apple’s financially healthy,” Bailey said, but their reputation for innovation is “dimming.”

This is a developing story and it will be updated.

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