An Apple a day

More than 65% of America’s smartphone market belongs to one company. That, at least, is the claim of the Justice Department, which puts Apple’s share of “performance” smartphones, the pricey sort, above 70%.^{1US Department of JusticeJustice Department sues Apple for monopolizing smartphone markets21 Mar 2024} On 21 March 2024 it filed an 88-page complaint^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024,5NBC NewsApple sued by Biden administration over alleged iPhone 'monopoly power'21 Mar 2024} in federal court in New Jersey, joined by the attorneys-general of 15 states and the District of Columbia^{5NBC NewsApple sued by Biden administration over alleged iPhone 'monopoly power'21 Mar 2024} , accusing Apple of monopolising the market. “Consumers should not have to pay higher prices because companies break the law,” said Merrick Garland, the attorney-general.^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024}

The charge is not that Apple makes bad phones. It is that Apple has made leaving them hard. The government says the firm has blocked super apps, cloud streaming, cross-platform messaging, third-party smartwatches and digital wallets,^{1US Department of JusticeJustice Department sues Apple for monopolizing smartphone markets21 Mar 2024,2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024,5NBC NewsApple sued by Biden administration over alleged iPhone 'monopoly power'21 Mar 2024} each of which might make an iPhone less necessary to its owner. “Apple has locked its consumers into the iPhone while locking its competitors out of the market,” said Lisa Monaco, the deputy attorney-general, as AP reported.^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024}

• Products
• Services

Where the money is. Apple, gross margin by segment, % of net sales

	Products	Services
2021	35.3	69.7
2022	36.3	71.7
2023	36.5	70.8

Source: Apple Form 10-K, fiscal 2023

The list is long, but the logic is short, and the numbers explain it. In its last fiscal year Apple earned a gross margin of 36.5% on products^{4SECApple Inc. Form 10-K for fiscal year 20233 Nov 2023} , the phones and laptops it builds and ships. On services, which brought in $85.2bn of sales, the margin was 70.8%.^{4SECApple Inc. Form 10-K for fiscal year 20233 Nov 2023} The hardware is the way in; the services are the toll booth. The App Store takes a commission of up to 30%^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024} on what users spend inside it, and Google is estimated to pay Apple $15bn-20bn a year^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024} to be the default search engine on the device. A firm that earns twice the margin on the thing sold after the phone as on the phone itself has every reason to make the phone hard to leave.

The two big tech suits are, in this respect, cousins. In its October 2020 case against Google,^{3US Department of JusticeJustice Department sues monopolist Google for violating antitrust laws20 Oct 2020} the Justice Department treats the default on the iPhone as something Google bought. Now it treats the seller as a monopolist in its own right. Both complaints describe the same transaction from opposite ends, which is a tidy piece of consistency and perhaps a worry for Apple.

The government’s case rests on that incentive. It also has evidence. William Kovacic, a former head of the Federal Trade Commission, called the complaint’s use of the company’s own papers “impressive excerpts from the firm’s own documents”^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024} . Antitrust suits are often won or lost on what executives were foolish enough to write down.

Apple’s reply deserves a fair hearing. It says the suit is “wrong on the facts and the law”^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024} and would “set a dangerous precedent, empowering government to take a heavy hand in designing people’s technology.”^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024} That is not a frivolous worry. Most people who buy an iPhone, at prices up to $1,599^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024} , are buying a closed, tidy system, and many like it that way. Judges are poor product designers. A ruling that told Apple how a phone must work would age as badly as the phone it described.

Yet the objection proves less than Apple wants. Nobody is asking a court to design the iPhone. The question is narrower: when Apple stops a rival smartwatch from working properly with the phone, or a competing wallet from tapping to pay^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024,5NBC NewsApple sued by Biden administration over alleged iPhone 'monopoly power'21 Mar 2024} , is it making the product better for the user or protecting a fat margin for itself? Those are different motives, and the law has long distinguished them. A firm may improve its product at the expense of rivals. It may not degrade the market simply to keep rivals out.

That test suggests where the government should put its weight. The sweeping claim, that Apple monopolises “smartphones”, invites a fight over market definition, in which Apple can point to Android and the government must explain why that does not count. The specific claims are easier to defend. Messaging, wallets and watches are all places where Apple sells a product of its own, and where a rival’s access depends on the favour of the firm it is competing with. If Apple has good reasons for each restriction, it can say so in court. If the reasons turn out to be the margin, the documents Mr Kovacic admired will show it.^{2AP, via AfricanewsJustice Department sues Apple, alleging it illegally monopolized the smartphone market22 Mar 2024}

The case will take years, and the iPhone will not be redesigned in the meantime. The more modest outcome is the more useful one: an Apple that has to justify each locked door, rather than a government that tries to rebuild the house.