Is This The End Of Apple’s Phone Supremacy?

Apple seems to be very worried about the Department of Justice’s new antitrust lawsuit, which landed Thursday with the backing of 16 state attorneys general and the District of Columbia—and you know what? It should be. Last month, according to Bloomberg, representatives from the company met with the DOJ in an attempt to stave this whole thing off. But that didn’t succeed, and now the United States government is targeting Apple’s key moneymaker: the iPhone itself.

It’s a fascinating suit for many reasons, not least because it reads like an almost emotional complaint from an Android owner resigned to being the green bubble in too many iMessage group chats, as my colleague Alex Kirshner notes. 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.

The U.S. government isn’t alone in this battle, either. Opening Apple products to the broader tech sphere has long been a key initiative for lawmakers around the world. Just last year, Apple finally agreed to integrate USB-C charging ports into the iPhone 15, next-generation AirPod Pros, and EarPods, freeing them from reliance on the infamous Lightning charging port. Before the EU finalized regulations mandating a common-charger standard across everyday tech products, Apple had bristled against any notion that it should comply, wishing to retain a lucrative, customized system that tacks forced costs onto charging accessories and makes it highly inconvenient for customers to switch between brands of phones.

The core concept there is of “switching costs”—i.e., how much leeway the consumer has to easily evaluate different goods and make the most economical choice. This lies at the heart of the DOJ’s lawsuit, too. “iPhone users perceive rival smartphones as being lower quality because the experience of messaging friends and family who do not own iPhones is worse—even though Apple is the one responsible for breaking cross-platform messaging,” stated Attorney General Merrick Garland at a press conference announcing the lawsuit. “And it does so intentionally. For example, in 2013, a senior executive at Apple explained that supporting cross-platform messaging in Apple Messages ‘would simply serve to remove an obstacle to iPhone families giving their kids Android phones.’ ”

The rest of the lawsuit is similarly peppered with juicy receipts from Apple’s internal messaging. The complaint starts off with an executive emailing Steve Jobs in 2010, complaining that an Amazon ad for the Kindle’s smartphone apps demonstrated “that it is easy to switch from iPhone to Android. Not fun to watch.” The suit continues: “Jobs was clear in his response: Apple would ‘force’ developers to use its payment system to lock in both developers and users on its platform.” All of this blocking has another negative effect on consumers, the suit continues: “Apple itself has less incentive to innovate because it has insulated itself from competition,” making it “not surprising that Apple spent more than twice as much on stock buybacks and dividends as it did on research and development.” One more: “In a 2019 email the Vice President of Product Marketing for Apple Watch acknowledged that Apple Watch may help prevent iPhone customers from switching. Surveys have reached similar conclusions: Many users say the other devices linked to their iPhone are the reason they do not switch to Android.”

As some analysts have noted, a lot of people really do just like Apple products; heck, I’m typing this very piece on a slick MacBook Air. But the federal government makes a compelling case that much of this love, especially within United States borders, is coerced—that consumers trapped in the fold stay there mainly because they don’t want to deal with the barriers to change. And, as such, they are forced to lean on the iPhone even as it gets more exclusive, worse, and more expensive.

There’s no reason, for instance, that Apple should get to charge a huge premium on iPhones when an app-maker can make an energy-reducing cloud-compute infrastructure that works better, yet is blocked from that expensive iPhone. But such gatekeeping is excellent for Apple’s bottom line at a time when it’s spurned any Jobsian innovation: “iPhone sales have made up a majority of Apple’s annual revenue every year since 2012,” with “some of the largest drivers” being the Apple Watch and the App Store. With limited options in the “performance smartphone” market specifically—as opposed to the wider market for less-opulent, entry-level phones—it’s little wonder that more than half of U.S. smartphone users cling to iPhones, instead of potentially cheaper, less elaborate, more tech-interoperable, and more practical options. (A possible reason Apple barely makes for a quarter of the global smartphone market, compared its 70 percent share in the U.S. market? Other countries already mandate more flexibility around super apps and banking.)

“People buy an iPhone and then buy another iPhone and then stay within the Apple family with Apple Watches,” said California Attorney General Rob Bonta, a co-litigator, in an interview. “That is all by design. The exclusionary, anti-competitive conduct that Apple engages in is like a moat around a kingdom: It keeps the customers inside the kingdom so that they can’t go anywhere.” Apple, of course, disagrees, as it wrote in a statement: “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.”

We have yet to see which thesis triumphs—the lawsuit will take years to litigate. But Apple is already backing down on a worldwide scale when it comes to foes like right-to-repair laws (which allow users to fix phones at home, with easily attainable components, instead of taking them to specialists), and on requirements that it not charge app-makers indefinite taxes for every monetary transaction made on an iPhone app. (They’re facing yet another lawsuit in that vein from Big Tech rivals like Meta and Microsoft.) Still, the government’s antitrust action is recognition that what makes the iPhone special is less that it’s inherently a great device and more that it’s a cash generator meant to squeeze profit out of every single option at hand. Maybe, after years of goodwill and avoiding government scrutiny, Apple will find itself in a place it hasn’t been in a long time: making products that can compete on their own merits.

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