Can you walk in to In-N-Out Burger and request a burger with McDonald's buns and a Shake Shack beef patty just because you prefer it?
On Thursday (Mar 21) following the Department of Justice's (DOJ) lawsuit against Apple AAPL 0.00%↑, Apple shares experienced a 4.1% decline, closing at $171.37. However, on Friday's (Mar 22) stock market session, Apple's stock saw a 0.5% increase, closing at $172.28.
The Start of the Saga
The DOJ, along with 16 other state attorney generals, sued Apple for trying to control smartphone markets, breaking a law called Section 2 of the Sherman Act.
The complaint accuses Apple of abusing its power in the smartphone and performance smartphone markets to maintain a monopoly and maximize profits. It alleges various anti-competitive practices, including:
Blocking innovative super apps, hindering apps with broad functionality that could ease switching between smartphone platforms.
Suppressing mobile cloud streaming services, preventing the development of apps and services for high-quality gaming and other cloud-based applications without expensive hardware.
Excluding cross-platform messaging apps, reducing their quality, innovation, and security to encourage iPhone purchases.
Limiting the functionality of non-Apple smartwatches, making third-party options less effective and pushing users toward Apple Watch.
Restricting third-party digital wallets, prohibiting tap-to-pay functionality and hindering the creation of cross-platform digital wallets.
In his remarks on the lawsuit, Attorney General Merrick B. Garland highlighted an example: when an iPhone user messages a non-iPhone user using Apple Messages, the text appears in a green bubble and lacks certain features:
The conversation lacks encryption.
Videos are of lower quality.
Users cannot edit messages or see typing indicators.
Consequently, iPhone users may perceive rival smartphones as inferior due to the subpar messaging experience with non-iPhone users, despite Apple being the cause of the cross-platform messaging issue.
Here is a snapshot marking the beginning of the 88-page document detailing the complaint.
Any Response from Apple?
On the same day as the lawsuit, Tim Cook traveled to Shanghai to inaugurate Apple's latest store, where eager customers awaited to explore the complete range of Apple products and services. Situated adjacent to the iconic Jing’an Temple, Apple Jing’an will feature a unique six-week Today at Apple program dedicated to celebrating the local community and its artists. Titled "Let Diverse Creativity Bloom in Jing’an," the series highlights Shanghai's emerging creators and their innovative use of iPhone's cutting-edge features.
In Feb 2024, Tim Cook disclosed that Apple has seen revenue growth in the December quarter, led by strong iPhone sales, and has reached an all-time high in Services revenue. The active device installed base has exceeded 2.2 billion, setting a new record across all products and regions.
Is it justifiable to attribute the growth to Apple maintaining a competitive edge through merit, or is it due to violations of federal antitrust law?
In a statement to TechCrunch on Mar 22, Apple expressed: “This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets. If successful, it would hinder our ability to create the kind of technology people expect from Apple—where hardware, software, and services intersect. It would also set a dangerous precedent, empowering government to take a heavy hand in designing people’s technology. We believe this lawsuit is wrong on the facts and the law, and we will vigorously defend against it.”
Looking through New Lenses: Does Antitrust Law Aid or Hinder Technological Progress?
In a speech in 2003, Thomas B. Leary, a former commissioner of the US Federal Trade Commission (FTC), questioned the idea that regular antitrust rules don't work for high-tech industries. He said that even though these industries are special, they're not totally different. Although their products are new, the main problems are still the same. However, while regular antitrust rules can be used for tech markets, there might be special things to think about because technology changes quickly.
High-tech industries often have significant upfront expenses but minimal additional costs. Creating computer software or pharmaceuticals necessitates substantial initial investments in research and development, with uncertain returns. Subsequent production and distribution costs decrease substantially, sometimes becoming negligible. As a result, prices are unlikely to be set at marginal cost. It's normal for prices to exceed costs, and this isn't indicative of competitive issues.
In addition to the cost and other supply-related factors mentioned earlier, certain high-tech industries may be affected by what are known as "network" effects—a demand-related phenomenon. In industries characterized by network effects, the value of goods or services grows as more people use them. Such industries could theoretically lead to a situation of natural monopoly, as the products or services offered by the industry leader become increasingly appealing.
Our Conclusion
You can't walk into In-N-Out Burger and ask for a burger with McDonald's buns and a Shake Shack beef patty just because that's your preference - this analogy closely mirrors the journey of transitioning to become an Apple user.
If you don’t like the products or services, don’t be a customer. People use Apple products because of simplicity, durability, brand/style, or whatever reasons they may have, and most of them are aware that by using Apple products, they may lose compatibility with non-Apple platforms or devices. In our opinion, this case is just another example of big government overreach in private sectors.
Another question emerges: Why initiate the lawsuit now? Apple has upheld its strategy of a closed ecosystem on the iPhone since the beginning. This is underscored by a quote from the 2007 iPhone launch event, where Steve Jobs cited Alan Kay's assertion, "People who are really serious about software should make their own hardware," as a core principle guiding Apple's choice to innovate with a comprehensive phone rather than concentrating solely on software development.
The Apple ecosystem combines hardware, software, and services. Users may feel restricted by Apple's control, leading some to compare it to a “luxury prison”. Once users are accustomed to Apple products, it's hard to switch to other options. Despite developers preferring the openness of Google's Android software, Apple remains closed. Switching from an iPhone to an Android device could result in losing access to certain content.
Regarding its stock price, indeed, this lawsuit serves as a distraction. However, how significant is this distraction?
We always aim to revert to the fundamental principles. Numerous factors can impact changes in a stock price, including earnings reports, market sentiment, company news, and market supply and demand dynamics. Regulatory changes can contribute to adverse market sentiment, which is just one of the many elements affecting stock prices.
Is it unexpected? Absolutely. Nonetheless, currently, we don't foresee any changes to the business model, given the expectation of lengthy legal proceedings before a resolution is reached. In the worst-case scenario, if Apple were to lose, it would need to level the playing field, presenting an opportunity to test its new innovations.