Why the Apple Antitrust Suit Matters

Investment Analysis Clubs Macro Economic Trends and Risks
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It’s Not Just Apple

In fact, the suit against Apple must be understood as a mere part of a revolution in policymaking.

In October of 2020, Democratic Congressmen David Cicilline and Republican Congressman Ken Buck released a blockbuster Antitrust Subcommittee report detailing the unfair monopolistic practices of four giant trillion dollar firms: Apple, Facebook, Amazon, and Google.

What kind of impact did that report have? Well, from 1998 until that report in 2020, the Department of Justice didn’t file a single monopolization claim against anyone, and certainly not against any powerful firm. Since the release of that report, enforcers in government filed major antitrust suits against Facebook, Amazon, Google, and now Apple.

There used to be a lot more choices in the smartphone market, but today, Samsung and Apple control 90% of the market. Still, one might think that Apple, at least from a consumer’s perspective, isn’t a monopoly. You can, at the end of the day, buy an Android phone.

The Antitrust Division has made a couple of points here. First, Apple has 70% of the ‘performance smartphone market’, aka high end smartphones, as well as 65% of the full smartphone market. That’s not 90%, but it’s a big share, and that share is durable.

Apple uses its app store to handcuff iphone users to its product.
It doesn’t allow rival app stores, and it doesn’t allow super apps to be sold through its own app store. According to the complaint, “as one Apple manager put it, allowing super apps to become ‘the main gateway where people play games, book a car, make payments, etc.’ would ‘let the barbarians in at the gate.’ Why? Because when a super app offers popular mini programs, ‘iOS stickiness goes down.’”

The point is, in China people have a choice of whether to use super apps, whereas in the U.S. we have to lock everything into the operating system of the smartphone we use.

The result is that Apple has monopoly power over not just how much we pay for smartphones, but over virtually every use of our smartphone and by extension everything that smartphone comes to touch, whether that’s business software applications, digital wallets, cars, or games.

Stroller explains the cellphone market in China is much different. It is a market of replacement. In the US the retention rate is 98%, China its 50%.
The reason is simple. In America, it’s difficult to move out of the Apple ecosystem. In China, it’s easy.

And one reason is because in China there are what’s called ‘super apps’ like WeChat or Alipay.

If you switch from Apple to a different phone, you can just download your super apps, and voila, you’ve switched. Thus the underlying hardware is commodified; competition on smartphones happens via price and features, and it’s aggressive.

Stroller goes into how Apple is sabotaging via messaging to an Android cellphone.
In 2022, Apple’s CEO Tim Cook was asked whether Apple would fix iPhone-to- Android messaging. “It’s tough,” the questioner implored Mr. Cook, “not to make it personal but I can’t send my mom certain videos.” Mr. Cook’s response? “Buy your mom an iPhone.”

Messaging is not the only area in which control its market space but also utilizes Apple pay & Car Play to boss banks and automobile industry.

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More pointedly, Apple’s fee structure for apps sold through the App Store is predatory and actively discourages innovation by app designers. How?

First, until recently, Apple required any app installed on an iOS device (smartphone or tablet) to come from the App Store unless you were a developer pushing a build directly from your Mac PC into the device for crash and burn development purposes. If you wanted thousands of people to try your app, it HAD to be exposed for download via the App Store which meant you had to pay Apple at least $99 per year to be a part of the Apple Developer program.

In reality, that $99 fee isn’t material and provides you access to release notes and other highly technical documentation any serious developer is going to want to have access to in order to design their app effectively and securely.

Slightly more onerously, Apple also charges a separate $99 fee that amounts to an Apple Quality Control check over YOUR application each time you submit it to be exposed in the App Store. Apple uses this QC check to spot any behaviors in the app it believes violate its user interface design guideliness, violate its end-user agreements with customers or engage in insecure or fraudulent actions that could harm the end-customer. There is still some value in this process in terms of keeping purposely harmful software out of the ecosystem but there is also an aspect of the “human factors taste police” that grates on many developers, particularly when Apple’s user interfaces have grown more cluttered and unintuitive in recent years.

Apple relaxed that download restriction and began allowing users to install apps from alternate sources directly to their phone. However, there is a third fee component imposed by Apple that is still highly abusive from a competitive standpoint. Until January 2024, Apple required any functionality within an iOS app that involved payments to use Apple’s in-house payment system AND required the developer to pay Apple a 30% cut of all such purchases. THIRTY PERCENT.

That means if you created an app for your customers to play a game or buy your favorite pizza with the click of a button inside an app, the app HAD to use Apple’s payment mechanism and you had to pay Apple 30% of that transaction as a fee. If those terms weren’t acceptable, then your app had to bounce the user to a web page accessed via browser and you had to design and operate a separate payment portal as a web app in order to collect those payments. That will typically be an inferior user experience and it would be clearly unnecessary given the capabilities of current software.

Apple was sued by a developer in the UK over this issue and wrangling in the case went all the way to the US Supreme Court which declined to hear the case, at which point Apple announced its plan for resolving this debate. Apple’s solution? Okay, we’ll let app developers integrate to external payment systems for in-app purchases. But Apple will still collect 27% (instead of collecting 30% for using its in-house engine).

Of course, Apple knows most independent payment processors charge between 2-5% for handling credit card payments, etc. so they know that the costs incurred by an app developer to a) negotatiate a contract with a third party, b) pay that third party’s 2-5% transaction fee and c) pay Apple 27% on that same transaction for doing nothing still makes the use of third party providers cost-prohibitive. While of course Apple gets to claim it is now “open” for third party providers. Which is nonsense.

Payment processing is important and proper implementation of a payment processing system can reduce fraud for consumers, merchants and banks alike. But the going rate for such integrations is well established at 2-5% across BILLIONS of transactions per day, which confirms how well undestood the problem is and how a competitive market is capable of driving down costs to a sustainable level for both providers and customers. Except when the transaction originates from within an ecosystem controlled by a single company. In that case, Apple decides it wants to collect 30%. Or 27% percent. Because it can.

This is how you know you’re dealing with a monopoly. There is nothing unique about the technology and products developed by Apple, Meta, Netflix, Google and Amazon that justified exempting them from aggressive antitrust enforcement. If you believe in free markets and you believe in capitalism itself, allowing market segments worth TRILLIONS of dollars to be dominated by one or two players is completely antithetical to maintaining a robust economy.

Consumers have become so anesthetized by the Moore’s Law based benefits of digital technologies that they think those benefits come only by the benevolence of the current monopolists. No, those benefits come from individuals innovating and it is very possible for some of those innovations to be squelched by incumbents because they threaten current products and revenue streams. Remember the RBOC telcos in the 1980s and early 1990s pitching ISDN as the “future” of networking? Wow… Chaining TWO 64kbs signals together… Grooooooovy, man. The example may change but the problem never goes away when companies get this large.

WTH

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Yep. I invest in Apple through my BRK position, but I don’t use Apple products and won’t pay the Apple “skim”.

Minimizing the “skim” – the key to retiring early.

intercst

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What ‘skim’ am I paying by using my iPhone?

JimA

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I use a $200 Android phone. An Apple phone with the same level of functionality is at least double that price.

intercst

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Heh, I don’t think Apple ever made an iPhone with that few functions! :slight_smile: Maybe the old iPod Touch? But, not having anything else since flip phones, maybe I missed something… I waited for Apple & Verizon to release the CDMA iPhone, at that time Apple produced two versions, GSM or CDMA, until later when they put both chipsets in, activated the one your provider used…

As a longtime investor & user, I just don’t see the problem… Developers have always had the choice to go on their own, but they wanted the security, market access of the App Store… Same on my Mac, some are loaded, updated from the App Store, others from the Developers servers…

Looking at my Battery usage, the heaviest usage is Safari, Facebook, Messages… None are providing anyone any ‘Skim’ just usage for what interest me… It links to my Apple Watch which has tripped on falls, lets me check my heart rate, an EKG if I want, as I’ve said elsewhere, to caught my wife’s fib early, it’s also warned of loudness hits…

To me, it all a todo about nothing… Stirred, as usual by competitors that can’t… A waste of taxpayer’s money and the DOJ’s time…

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Yeh, my $200 Android smartphone my not have a 100 megapixel camera that can photograph a chipmunk at a quarter mile, but so far, that requirement hasn’t surfaced for me. {{ LOL }}

intercst

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Who else would complain except competitors? Millie von Tillie down at the library? I heard the same complaint from Microsoft lovers during their stand in front of DoJ (which was also warranted, in my view.)

It’s clear to me that the 30% tariff in the App Store is inappropriate, not in all cases but surely in many. Apple has purposefully made it difficult for people to “subscribe” any other way. The EU has forced several changes, most for the better.

Maybe you need to take off the Apple colored glasses and consider the arguments on the merits?

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Clearly we have different definitions of ‘skim’.

Congrats; you win.

JimA

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Nah, can’t do that if I see no merits to the accusation(s)…

As part of Ma Bell, way back, ol’ Judge Greene tore up AT&T & the RBOCs over a competitor wanting to slip in under the door in those times, cost so many jobs, and guess what, nobody’s bills went down… So, been there, done that…

On the other hand, AAPL dividends have more than paid for the hardware, beyond the usefulness…

So now I should expect to find Kirkland products in every Target store? Or any other house brand in any and all other competitor’s stures?

I don’t see demands that my DeWalt batteries fit all Ryobi or Makita, Milwaukee tools… Or all my Ford parts fit GMC or any other brand… Again, a waste of taxpayer money and DOJ time…

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You’re kidding, right? Phone calls are now available in a wide variety of price ranges, and it’s trivial to find a way to make them free, even to foreign countries using different technologies. That would most certainly not be true if Ma Bell had kept a stranglehold on the system. Heck, using a fax machine was a vastly expensive and complicated process because they wouldn’t let “non-Bell” machines connect to the network.

Working in radio at the time we had to contract with Ma for expensive “long lines” for remote broadcasts and sporting events. Eventually alternate technologies (Marti radio, among others) became available, but nope, couldn’t use those either if any part of the loop involved the telco. (They relented after a while.)

I don’t think I need to point out that most people don’t get “Apple dividends”, and that’s a slim justification for holding a system which raises prices on everyone so a few can get an outsize profit benefit. If it’s not, please let Bill Gates and John D Rockefeller know you thought their closed, anticompetitive systems were really swell.

Different issue, although I will say that if a dealer refused to allow non-OEM parts on their cars (oh wait, they used to until DoJ forced them to stop) it would be actionable.

It’s amusing to see the exact same tropes as I responded to 20 years ago during the Microsoft trial trotted out in defense of Apple (of all companies!) The interesting thing for me is that eventually Apple will relent, either voluntarily or not on some of these issues, and life will go on and the company will be fine. They will find new ways to get better at serving the customer (as Microsoft did) or they will let go of their stranglehold and lose out (as IBM did) but either way, the public will be better off.

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Once again, the big winners will be the lawyers.

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It’s not just the USA
X-Post at Stocks A to Z

EU takes on anti-competitive tactics of Apple, Meta and Alphabet

In that thread I said:

It’s high time the Trust Busters got back in the game.

The Captain

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Article in Slate:

The End of the iPhone as We Know It

Even if you’d never go to an Android, you’ll benefit if the feds win their new legal effort against Apple.

But iMessage’s grip on the text-messaging ecosystem makes for just one plank of the government’s case, which also targets four other areas: multiservice “super apps” that can run their own internal marketplaces and programs outside of App Store fees and surcharges (e.g., [China’s WeChat and Alipay]), cloud-streaming apps that reduce energy dependence on Apple’s built-in premium hardware, non-Apple-brand smartwatches that may be cheaper than the Apple Watch, and non-Apple-brand digital wallets that may be more secure, and more directly connected with one’s bank, than the Apple Wallet (e.g., PayPal or Fitbit).

The issue, as the feds put it, is that Apple keeps such tight control over its self-branded features in these sectors that it prevents consumers from seeking less pricey or more interoperable alternatives beyond Apple’s “walled garden.” And this is an antitrust issue because it forces consumers to cover surcharges on all Apple accessories and features even when they’re not necessary. Basically: You should be able to buy a different brand of smartwatch and sync it with your iPhone if you’d prefer. Or, you should be able to connect your iPhone to a virtual system in your electric car that’s not limited to Apple CarPlay. Or, you should be able to store your payment information (credit cards, etc.) on an encrypted wallet not directly linked to Apple, which [isn’t quite] the privacy champion] it makes itself out to be.

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