The Department of Justice Takes Aim at Apple’s iPhone Empire

Next year marks the end of the first quarter of the twenty-first century. Reflecting on the last 24 years conjures up all sorts of turning points: the September 11 attacks, the Great Recession, and the Covid-19 pandemic. But the most enduring one might be the release of the iPhone in 2007. More than any other device of the internet age, Apple’s flagship product erased the divide between the digital world and the real world. In the smartphone-driven era that followed, people can no longer simply log off.

After it changed modern life, change might be now coming to the iPhone. The Justice Department, along with 16 state attorneys general, announced on Thursday that it had filed a major antitrust lawsuit against Apple for monopolizing smartphone markets. In court filings, the department accuses Apple of maintaining the iPhone’s dominance by undermining rival phonemakers that could offer cheaper alternatives through unfair and anticompetitive tactics.

“Consumers should not have to pay higher prices because companies violate the antitrust laws,” Attorney General Merrick Garland said in a statement. “We allege that Apple has maintained monopoly power in the smartphone market, not simply by staying ahead of the competition on the merits, but by violating federal antitrust law. If left unchallenged, Apple will only continue to strengthen its smartphone monopoly.”

The case is a huge test for the Biden administration’s renewed emphasis on antitrust enforcement, especially where Big Tech is concerned. But the implications of this case could go far beyond a single administration’s checklist. The iPhone’s dominance is so entrenched that any disruption could have far-reaching consequences. That, the government suggests, is precisely why it must be challenged.

Apple reached the top of the smartphone market through innovation, the Justice Department’s 88-page complaint alleged, but it then sustained that dominance through monopolistic tactics. Ironically, the government pointed to its own successful antitrust lawsuit against Microsoft in the 1990s as the starting point for Apple’s rise. The 2001 consent decree that ended the antitrust battle required Microsoft to allow companies and third-party developers to produce their own browsers and media players for the Windows operating system.

“The ubiquity of iPod and iTunes on Windows, in part because of a successful antitrust enforcement action against Microsoft, contributed to the development and success of Apple’s next flagship product—the iPhone,” the complaint explained. “But after launching the iPhone, Apple began stifling the development of cross-platform technologies on the iPhone, just as Microsoft tried to stifle cross-platform technologies on Windows.”

Part of that dominance comes from the App Store, where iPhone users can install a wide variety of apps by third-party developers onto their devices. For the overwhelming majority of iPhone owners, the App Store is the exclusive means by which they can download these programs. Apple, according to the government, wields near-dictatorial power over developers who want to distribute apps through the App Store, mainly through contractual conditions and lack of alternatives. It also collects hefty fees on every transaction through the store, in what the complaint described as “monopoly rents.”

“As Apple exercised its control of app distribution and app creation, Apple slowed its own iPhone innovation and extracted more revenue and profit from its existing customers through subscriptions, advertising, and cloud services,” the government alleged. “These services increase the cost of switching from the iPhone to another smartphone because many of these services—including its proprietary gaming, cloud storage, and news service—are exclusive to the Apple ecosystem, causing significant frictions for iPhone users who try to use alternative services on another smartphone.”

This isn’t the first time that the App Store has come under scrutiny. The European Union passed the Digital Markets Act in 2022, which will soon require Apple to allow for alternative app stores and in-app payment systems. In 2021, developer Epic Games filed an antitrust lawsuit of its own against Apple in the United States to challenge some of its App Store practices. A federal judge ruled in 2021 that Apple could no longer ban app developers from directing users to in-app payment options that would circumvent Apple’s 30 percent “tax” on in-app purchases.

The Justice Department’s lawsuit nonetheless goes much further than past regulatory efforts to tackle what it describes as more subtle means of monopolistic behavior on Apple’s part. Nearly every person who owns a smartphone, for example, has experienced the “green-bubble issue.” Messages between two or more iPhone owners show up as blue on iMessage, while texts between iPhone owners and owners of other smartphones show up as green.

The green-bubble thing is more than just an aesthetic choice. iPhone-to-iPhone conversations enjoy the full suite of iMessage’s capabilities: emoji reactions, encryption, the three-dot bubble that shows when someone is texting you, and so on. Including even a single non-iPhone user in a group chat with other iPhone users breaks that functionality. The Justice Department described this as an intentional tactic to undermine other smartphones’ viability in the marketplace.

“This signals to users that rival smartphones are lower quality because the experience of messaging friends and family who do not own iPhones is worse—even though Apple, not the rival smartphone, is the cause of that degraded user experience,” the complaint said. “Many non-iPhone users also experience social stigma, exclusion, and blame for ‘breaking’ chats where other participants own iPhones. This effect is particularly powerful for certain demographics, like teenagers—where the iPhone’s share is 85 percent, according to one survey.”

Owners of Androids and Pixels are probably familiar with this phenomenon, and even iPhone users can probably recall times when they’ve had an initial moment of frustration at seeing that green bubble appear. Apple’s tactics, the complaint argued, reinforce the company’s market share “not because Apple has made its smartphone better, but because it has made communicating with other smartphones worse.” The Justice Department also alleged that this strategy is entirely intentional by Apple’s leadership.

“Apple recognizes that its conduct harms users and makes it more difficult to switch smartphones,” the complaint said. “For example, in 2013, Apple’s Senior Vice President of Software Engineering explained that supporting cross-platform OTT messaging in Apple Messages ‘would simply serve to remove [an] obstacle to iPhone families giving their kids Android phones.’ In March 2016, Apple’s Senior Vice President of Worldwide Marketing forwarded an email to CEO Tim Cook making the same point: ‘moving iMessage to Android will hurt us more than help us.’”

Apple’s constellation of iPhone-related products also came under the department’s scrutiny. In 2015, Apple released the Apple Watch to enter the wearable-devices market. The Justice Department alleged that Apple used that product to maintain its iPhone dominance in two ways. On one hand, the company restricts the degree to which third-party wearables can interact with the iPhone; only the Apple Watch has access to functions like notifications, for example.

On the other hand, the Apple Watch is exclusively compatible with the iPhone. The Justice Department said that exclusivity is designed to make it harder for customers to switch products down the line. “If Apple can steer a user towards buying an Apple Watch, it becomes more costly for that user to purchase a different kind of smartphone because doing so requires the user to abandon their costly Apple Watch and purchase a new, Android-compatible smartwatch,” the government claimed.

Those tactics exert their own gravity over industries beyond the smartphone market. Part of the Justice Department’s complaint alleges that Apple blocks other digital-wallet apps from using Apple Pay’s tap-to-pay functionality. That refusal—as well as the iPhone’s dominance—allows Apple to extract fees from banks that Samsung and Google don’t seek. It also claims that Apple has told automakers that upcoming versions of Car Play “will take over all of the screens, sensors, and gauges in a car, forcing users to experience driving as an iPhone-centric experience if they want to use any of the features provided by CarPlay.” (Apple recently abandoned its own plans to enter the auto industry.)

Taken as a whole, the Justice Department claimed that each of Apple’s tactics reduces competition from rival smartphone makers, suppresses innovation by third-party app developers, and ultimately harms consumers. “Apple’s conduct has made its own products worse, sacrificing the short-term profits Apple could earn from improving the iPhone in order to preserve the long-term value of maintaining its monopoly,” the complaint alleged.

Apple goes to great lengths to maintain the iPhone’s market dominance because it is incredibly lucrative. When it became the world’s first $3 trillion company in 2023, Apple alone amounted to roughly 8 percent of the value of the entire S&P 500, an index of the largest publicly traded companies on U.S. stock exchanges. “Apple’s net income exceeds any other company in the Fortune 500 and the gross domestic products of more than 100 countries,” the complaint noted. The majority of that revenue comes directly from iPhones.

Apple’s golden goose won’t stop laying eggs any time soon. Major antitrust cases can take a while to work themselves out. The Justice Department is already waging legal battles with Amazon and Google, two of Silicon Valley’s other giants, over their own anticompetitive practices. And even if regulators prevail, their proposed solutions are not as far-reaching as they were against Microsoft a quarter-century ago, when the government sought to break up the company in the manner that Standard Oil and the Bell System were eventually brought to heel. People will likely still buy a lot of iPhones, year after year.

Indeed, Apple’s rise over the last 25 years shows the virtues of vigorous antitrust enforcement. The Justice Department’s consent decree against Microsoft forced it to surrender some of its Windows-led dominance. Now, thanks to its cloud-computing division and investments in generative A.I. programs, Microsoft recently surpassed Apple to become the world’s most valuable company once again. And if regulators successfully loosen the iPhone’s alleged grip on tech innovation, the next big thing—whatever that may be—could be coming right behind it.