Apple antitrust case is surprisingly simple

Getting to the point. Apple cannot stand athwart history. So argues the U.S. Department of Justice in an antitrust suit it brought against the $2.7 trillion iPhone maker on Thursday. Of all the lawsuits, fines and legislation lobbed Apple’s way, this case strikes deepest at what is essentially a simple problem. Apple changed the world by selling better devices – but its success could hinder the next big shift.

Tim Cook’s company makes money from two things: gleaming devices, which users choose of their own volition, and services, which sometimes they don’t. The U.S. trustbusters say the firm claims 65% of the smartphone market, but that it jealously gates lucrative interactions, like accessing apps or making a payment with a phone. App-makers pay tolls, if Apple even allows them in its app store. Accessing some hardware features, like tap-to-pay, is barred.

Users might well favor Apple’s choices anyway. They might voluntarily opt to have their searches default to Google, whose owner Alphabet GOOGL.O pays billions of dollars to remain the iPhone’s default engine. They might flock to Apple’s own wireless earphones or smartwatches even if it were equally appealing to go with rivals. Until now, that hasn’t been put fully to the test.

There’s value at stake if the Justice Department prevails. Apple’s services division generated $85.2 billion of sales in 2023, with a gross margin double that of its hardware. The “toll” element of that includes perhaps $20 billion from Google, Bernstein analysts reckon. Then there’s the App Store itself. The DOJ suit, along with a case against Alphabet and various European regulatory moves, threatens it all.

But there’s more at stake in the future, because in a world of cloud-based services, Apple could look less special. The case quotes an Apple employee fretting that someone could buy a $25 phone and “have a solid cloud computing device.” As computing power moves to giant server farms, users can stream apps that far exceed their devices’ own capabilities. If a phone simply becomes a portal to the cloud, Apple has less to offer, notwithstanding its devices’ slick appearance.

Attorney General Merrick Garland has linked the new assault on Apple to the lawsuit against Microsoft decided in 2001, which helped loosen its restrictions on desktop computers and free the independent web. The firm run by Satya Nadella managed to remain gigantic by offering products and services – from cloud computing to social network LinkedIn – that people use even when they have alternatives. Apple may soon have to do likewise.

Apple cannot stand athwart history. So argues the U.S. Department of Justice in an antitrust suit it brought against the $2.7 trillion iPhone maker on Thursday. Of all the lawsuits, fines and legislation lobbed Apple’s way, this case strikes deepest at what is essentially a simple problem. Apple changed the world by selling better devices – but its success could hinder the next big shift.

Tim Cook’s company makes money from two things: gleaming devices, which users choose of their own volition, and services, which sometimes they don’t. The U.S. trustbusters say the firm claims 65% of the smartphone market, but that it jealously gates lucrative interactions, like accessing apps or making a payment with a phone. App-makers pay tolls, if Apple even allows them in its app store. Accessing some hardware features, like tap-to-pay, is barred.

Users might well favor Apple’s choices anyway. They might voluntarily opt to have their searches default to Google, whose owner Alphabet GOOGL.O pays billions of dollars to remain the iPhone’s default engine. They might flock to Apple’s own wireless earphones or smartwatches even if it were equally appealing to go with rivals. Until now, that hasn’t been put fully to the test.

There’s value at stake if the Justice Department prevails. Apple’s services division generated $85.2 billion of sales in 2023, with a gross margin double that of its hardware. The “toll” element of that includes perhaps $20 billion from Google, Bernstein analysts reckon. Then there’s the App Store itself. The DOJ suit, along with a case against Alphabet and various European regulatory moves, threatens it all.

But there’s more at stake in the future, because in a world of cloud-based services, Apple could look less special. The case quotes an Apple employee fretting that someone could buy a $25 phone and “have a solid cloud computing device.” As computing power moves to giant server farms, users can stream apps that far exceed their devices’ own capabilities. If a phone simply becomes a portal to the cloud, Apple has less to offer, notwithstanding its devices’ slick appearance.

Attorney General Merrick Garland has linked the new assault on Apple to the lawsuit against Microsoft decided in 2001, which helped loosen its restrictions on desktop computers and free the independent web. The firm run by Satya Nadella managed to remain gigantic by offering products and services – from cloud computing to social network LinkedIn – that people use even when they have alternatives. Apple may soon have to do likewise.