First of all, a disclaimer. I was never going to like the DOJ’s case against Apple, just as I don’t like the EU’s regulation of Apple. I love Apple. I’m an Apple fan. And I am very happy with that position. I brutally enforce an Apple monopoly in my own household and believe everyone is better for it. So you want to accuse Apple of stifling innovation I’m gonna have a problem with it.
But Apple is a very large company. It attracts antitrust attention, and I spent a lot of time involved in cases helping competition authorities pursue companies with market power. I am a believer in antitrust law. What’s more, I have worked with the DOJ on antitrust cases and believe in their general cause which makes this newsletter somewhat painful to have to write. Moreover, I don’t expect Apple to be good about all of this. I expect them to be ruthless profit maximisers. They have been here (cough eBooks cough) before.
But antitrust law has its limits, and I think for good reason. It wouldn’t be a great world if every time a company is successful in the marketplace, it has to be reined in. I think that would lead to more harm than good. But at the same time, when companies are violating the law, I think they need to be prosecuted quickly to ensure they don’t do more harm than good. Over the years, I have come to appreciate that the careful application of antitrust law helps us sort the good from the bad. It isn’t the end of competition — regulation can often play a critical role — but it certainly stands the test of time.
So, it is with my antitrust hat that I am disappointed today with the DOJ’s case against Apple. I place weight on these matters because I think that the way in which government enforcement plays a critical role in the actual, soft application of the law prevents companies from doing bad things out of concern for the prospect of facing sanctions rather than doing the bad things and hoping the sanction isn’t too large. If companies can just comply with the law without the need for costly enforcement, that is the quickest route to better competitive outcomes.
In today’s post, I read the DOJ complaint and analyse what that complaint actually says rather than the hyperbole that is being promoted in the media. This post isn’t likely for most readers of this newsletter who come here for amusing takes on AI but I have to get this stuff out of my system.
Background
OK, here’s the story. One day, Apple invented the iPhone. Then, they did a lot of stuff, and they ended up with a large share of smartphone sales. And they absolutely enjoy the profits from all of that. I don’t imagine that they do much hand-wringing about being able to sell iPhones for more every year.
However, the focus of the investigation is not on the fact that Apple ended up on top but on concerns about the “stuff” that they did along the way. The DOJ didn’t focus on all of the “stuff,” just the stuff they have a problem with. That is why there isn’t anything in the report that talks about how you used to just text, and then one day, you could tap on someone’s text and give a little thumbs up or Haha! or throw a party, etc. But that’s stuff we didn’t used to be able to do and now can.
So let me list here the stuff the DOJ does list that they have a problem with. Some of this stuff is about things that you can’t do on an iPhone, which gives the definition of “stuff that Apple did” equivalent to “stuff Apple didn’t do.”
Use cloud streaming services for games and other stuff that might require computation. I say games because the DOJ can’t mean the really computationally intensive stuff like Mathematica Online or ChatGPT, which are some sort of cloud service.
Install “Super Apps”. These are apps that allow mini-apps inside them that do stuff. I hadn’t heard the term but was talked about by a16z and I met someone the other week who was very upset that Apple didn’t have WeChat like they do in China. That said, I couldn’t quite work out how these are different from Netflix offering games right on my iPhone or the bundle of apps that SetApp curates.
Some of this stuff is stuff that you can’t do on other phones:
Give a little thumbs up to SMS texts on iMessage with a green bubble that the sender can see.
Let your SMS texts on iMessage receive a little thumbs up for texts you sent to another phone.
Have and use an Apple Watch.
Use your digital wallet to send money to another smartphone or your wallet to another smartphone. (Although I am not sure you can use this to send money to other iPhones, I’ll have to try to unpack that. I also know that I can’t send my wallet to another iPhone and have to transfer all of that whenever I set it up — at least the credit cards and stuff.) The DOJ is also worried about you being able to use “your trusted banking apps” in your digital wallet. (This might be a US thing, but I have never referred to my banking app as “trusted.” I referred to it as a lot of other things, but not that, and it never occurred to me that I wanted it to pop up in more places than it currently does. But maybe US banks are so great that they are just waiting to unleash innovations that are being stopped in that regard.)
That’s the full list, although they allude to the fact that there is possibly other stuff. You will notice that the DOJ does not appear to be upset that app developers who want to develop apps with adult material can’t do so on iPhones,, and I imagine they could find evidence of consumers who might want that. They also seem not to be upset that Apple doesn’t allow me to stop being notified every time someone puts a little thumbs up to someone in a group iMessage chat stream when all I want to know is what people are saying rather than feeling. But I digress. My point is that we should be able to understand clearly why some “stuff” Apple does is fine and other “stuff” Apple does is not fine.
What Makes Stuff “Not Fine”?
Antitrust law isn’t really that complicated. Here is what makes something not fine:
A company decides not to do something its customers would want (and would be willing to pay more than it costs to do it)
AND the reason it made that decision was that it was going to create more competition for it in the future.
That helps us sort stuff out. But it isn’t quite the end of the story. Companies are allowed to do those things because they are stupid — for instance, they think they are preventing competition in the future but actually are just shooting themselves in the foot. Companies are not allowed to do those things if they actually work to reduce competition in the future — whether they are stupid or evil. So your local pizza store might decide they don’t want to serve customers that they saw go into rival pizza stores, but that isn’t likely to lead to an antitrust violation because we don’t think that is going to materially prevent them from facing competition in the local pizza market.
Competition where?
To evaluate the DOJ’s claims against Apple, let’s start with the market they are concerned about: the market for performance smartphones or smartphones more broadly. Here is the tweet-level summary of their claim:
One thing to get out of the way is, “WTF is a performance smartphone?” To me, it is an iPhone, but that’s me. Apparently, it is a good or late-stage smartphone that has more hardware. I’m not sure it is a Pro model. And I don’t know whether there was a time that Apple did not produce performance smartphones and then suddenly did. I don’t mean to be cynical, but this is a way of edging the market share numbers up. The DOJ realised this and hedged their bets by pleading with the broader smartphone market.
The important thing about this case is that the DOJ is not pleading any other market. They don’t talk about a reduction in competition in the market for cloud gaming services, the banking system, or even the market for personal textual communications with graphically created feelings. Importantly, they did not say that Apple used its market power in smartphones to monopolise the app market. Why? For one, most apps compete with other apps and not Apple. But the DOJ could have claimed that iMessage was monopolising the message app market or Facetime, the video app market, or wherever you might want to go on that. That means that many app developers pay 30% of their revenues to Apple, which is not a leverage of monopoly power in that market. What it is is hard to say. However, if the DOJ has a problem with that, it is because it cements Apple’s market power in smartphones. How might it do that? I’ll come to that in a bit.
Switching Costs
The crux of the argument is that Apple is doing stuff that raise “switching costs.” Now this is a solid thing that companies can do to insulate themselves from competition. Make it hard for people to switch to a competitor. But we have to remember that the whole point of competition is to give the firms the opportunity to do things that make consumers less likely to want to switch to a competitor. Thus, we are in the realm of sorting out bad from good stuff.
The high switching cost is that once you have an iPhone and have bought a whole heap of apps, the DOJ claims you have to buy those apps again if you want to switch to Android. This is an evidentiary matter, and I tried to think of which apps I would have to buy again if I switched to Android. Honestly, I couldn’t think of one. All the apps I pay for are by subscription, so I would have to switch my subscriptions. But lots of them just let me do that anyway. And even if there are such apps, how expensive are they? The phone price differential is in the hundreds of dollars, but could it be that people have hundreds of dollars of apps that would make it financially too costly to switch? I guess we will see.
What of Apple’s app store restrictions that make it hard or impossible to make certain types of apps including cloud streaming etc? There are two scenarios and each does not relate to switching costs. First, because Apple stops those apps, others can allow them which gives consumers more reason to switch not less. Apple doing those things does not seem to help insulate it from competition, it invites competition.
Second, what about this ecosystem effect? Here is the relevant DOJ claim:
Here is the argument: app development is costly. Apple has a large market share. If Apple says no, it isn’t worthwhile inventing the app for the half of the market that doesn’t have an iPhone. So, we see fewer apps developed. The idea is that this helps Apple maintain its monopoly because it doesn’t allow these apps to actually pop up elsewhere. Again, this theory is an evidentiary matter, especially when you realise the app development market is likely global, but is it a switching cost? No, it isn’t. Apple hasn’t made it harder to switch to Android. At best, the sum of this means that there is less opportunity for Android to develop and promote differentiated apps. (And of course, Android is promoted by Google and has, checks notes, a valuation of $1.85 trillion, much less than Apple’s $2.65 trillion, so the DOJ is claiming that is too much of a competitive asymmetry here. Again, the evidence will be interesting.)
Green Bubble Shame
Let’s turn to the issue with iMessage. The problem is that you need to be on iMessage to use all of iMessage’s features. This isn’t a new thing. It happens with WhatsApp, Signal, etc. But iMessage is different because it started as the iPhone’s SMS app (and used to even have a little SMS on the icon). Apple then built stuff on top of that and figured that consumers would be happier not having to use a separate app for SMS and other stuff. But to deal with the fact that you might communicate with someone who can’t get all the Apple features or, importantly, for whom you might have to pay an SMS fee (remember them? They were very high kids.), Apple devised a simple solution. iMessage stuff came in blue, and SMS-only stuff came in green: the apparently dreaded Green Bubble.
As it turns out, the DOJ sees that as part of Apple’s evil plan:
Well yeah. And it goes both ways. I certainly feel superior when talking down to someone with a green bubble. It takes the edge off that high iPhone price. That said, have you ever met an adult Android user? They are smug folk, all high and mighty of their freedom from the walled garden. Well, you can stay outside while I stay inside smelling the roses.
Back to antitrust. This argument is unprecedented. I do not recall seeing social stigma as an antitrust violation or part of one. This isn’t the old days when you wanted to write something on WordPerfect and send it to someone who could edit it in Microsoft Word. Instead, it is that you feel bad if you don’t have what everyone else is. Well, here’s the thing: that’s not an antitrust issue any more than it is a commentary on the nature of social preferences. If Apple is building market share by making everyone want to join in, I have news for you that happens pretty much everywhere. Have you looked at the clothes you are wearing? Have you compared it to the clothes you got to wear during Covid-19?
But let’s go with it. Suppose that the DOJ wins out and the teenager they give an Android phone doesn’t have to feel bad anymore. What if iMessage was changed, and it all had to be the same colour? If that’s the case, you won’t appear as a green bubble any more, and we will all be blue. Now, if you use some other feature, what will happen? Could it just not work? What would that do to communication if you don’t see the three little dots indicating someone is typing, only for it to stop and have you wonder what they were going to say? It doesn’t seem like that’s a good outcome.
The alternative is for Apple to unbundle iMessage from SMS. SMS becomes a separate app. Is that going to help here? It doesn’t seem like it.
And there’s the issue: what is the solution to this whole problem? We actually know. It is the unbundling solution. It is WhatsApp. If you are a parent, you want to push your kids to WhatsApp. This means that as a parent, you will have to learn to use WhatsApp. Now, there’s a switching cost, at least in anticipation. The point is, even if the green bubble is the cause of Apple’s market power, it is a cause without a clear-cut solution.
By the way, the youth turn up a lot on this complaint. The DOJ says the monopoly is really amongst the young because teenagers buy iPhones. This is contrary to the usual economic logic that says those groups are more price-sensitive. They do say they are higher-income households, which makes more sense.
Apple could have been more evil
As I read the complaint, I thought of all of the ways Apple could have been more evil. Here are some random thoughts:
Grey bubble: imagine if it wasn’t a green bubble or a grey or brown one.
40% app store commissions. After all, that is not unprecedented, and when Apple was setting up the App Store, it had the market power of a local pizza store in smartphones (remember Crackberry?). So why not 40% rather than 30%?
Make Apple TV Plus content exclusive to Apple devices. It is currently available everywhere — even on Samsung TVs. They didn’t have to do that. Imagine if you needed to have an Apple device to watch Coda. I wanted to see that Weird Al move and purchased a $30 Roku because that was the only way. A true and tried strategy to build market share.
Just push U2’s latest album to everyone’s iPhone. Oh yeah, they did that. It was pretty predatory. Where was that in the DOJ complaint?
To be sure, even the DOJ seems a tad disappointed that Apple TV can’t feature more in the case …
The broad point is that Apple could have done more and would be no more liable than the DOJ is claiming in this case.
Why is the US Different?
OK, now let’s do some economics. Let’s suppose that everything has gone down the way the DOJ claims. Apple did all this bad stuff, and it resulted in a 70% plus market share of the smartphone market in the US.
The question I have is: why didn’t that work everywhere else?
Take a look at the iPhone market shares all over the world. Yep, North America stands out, as does Britain, Sweden and Japan. Oh and also North Korea — with like 100% iPhone share despite their relationship with China. But in the rest of the world, it is a 40% share or lower. This includes most of Europe.
Here’s the thing. Everything that Apple did in the US, it did everywhere. So explain to me how it can lead to monopolisation in the US but not elsewhere? Some might say, “well they use WhatsApp in Europe.” And maybe that’s the answer. But how can we claim that Apple violated antitrust when they didn’t do a thing to harm the use of WhatsApp. That’s on WhatsApp, which I should remind you is an American company!
So we don’t have to go line-by-line through the DOJ claim or years of a court case to have a genuine economic puzzle. If what the US says was true about Apple’s conduct — that it leads to monopoly — then that should have happened everywhere. The fact that it hasn’t tells is that the most likely thing is that Apple’s market share has nothing to do with that conduct and all to do with other factors likely outside of Apple’s control.
Back to the Books
To end this very long discussion, I want to return to where the DOJ starts their story. Here is the beginning …
Yes, the Kindle app. Here is something that I desperately want from Apple, and they have never supplied me, aka their ultimate fan. I want to be able to buy Kindle books directly from the Kindle app on my iPad. I threw away my Kindle the day I got an iPad. My spouse uses a Kindle, and we share books, so no iBooks for us. She can buy books from the Kindle, but I can’t do the same without going to a website that Amazon has kept crappy for years. I want that functionality, and Apple’s app store rules have prevented it. So, the DOJ start here resonated with me.
But that was it for books in the DOJ claim. Even despite the past antitrust history on that very issue with Apple, they didn’t mention books at all in the complaint. Where did they go? At some point, that was an antitrust concern, and it is a pain point.
It was on that issue that I had expected the DOJ case to focus. It was tangible, and other jurisdictions are trying to deal with it. Now, there are problems with that, and I can’t recommend Steve Sinofsky’s 18000-word tome on the damage the EU approach to regulation is likely to do to innovation highly enough, but I figured that is where the DOJ would go because whether Apple likes it or not these things are changing and I figured the US wouldn’t want to miss out.
Instead, they decided to go with the kitchen sink “Apple is destroying innovation” approach, which will take years to go through the process and delay any incentives to think about reducing regulatory uncertainty in the process. I’m not saying that I would have supported that. I don’t want governments messing with Apple. However, it would have been more proportionate and practical and helped preserve the credibility of US antitrust enforcement.