Why is the US DOJ filing an antitrust lawsuit against Apple–on monopolizing the smartphone market?

March 22, 2024 | by

The Department of Justice’s antitrust filing against Apple on the iPhone is a many-splendored thing–and will take many years to work through the courts. It was filed Thursday 21 March in the US District Court for the District of New Jersey, alleging monopolization or attempted monopolization of smartphone markets in violation of Section 2 of the Sherman Act. New Jersey’s US District Courts are in beautiful Newark, Camden, and Trenton. The DOJ was joined by 16 states in the lawsuit including NJ. Apple has promised to fight it tooth and nail, correctly realizing this goes to the core of its business. “This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets” and “We believe this lawsuit is wrong on the facts and the law, and we will vigorously defend against it.”

On the face of this, the DOJ antitrust lawsuit seems almost ludicrous. While iPhones have a 60% market share in the US (Backlinko), there’s plenty of Android phones from Samsung and others (sadly, no longer LG) at competitive prices from every carrier. This Editor never looked twice at an iPhone for personal use and wasn’t impressed by a short-lived company phone, a totally locked-down iPhone 6. (On the other hand, my second computer at work where I really self-learned computing was an easy-to-use Mac 2si, a long time ago.) There are about 140 million iPhone owners in the US. Obviously, Apple makes a product and ecosystem, including the Apple Watch, that people, especially US upper-income users, prefer. There are features that Androids have and iPhones have, and sometimes the twains don’t meet, but for most of us it doesn’t matter.

But does Apple act in an anticompetitive, monopolistic way?

The DOJ says yes. The complaint states that Apple uses its control over the iPhone to engage in a broad, sustained, and illegal course of conduct, using its monopoly power to extract as much revenue as possible. The specifics include some centering on the Apple Watch:

  • Apple has exclusive software features–apps–that Android manufacturers don’t have or don’t work as well, for instance Apple Pay, iMessage, Find My Phone, FaceTime, and AirTags.
  • Apple Pay blocks other financial institutions from instituting their own cross-platform payment systems.
  • Apple’s control over app developers in their ‘walled garden’, locking them in especially in the cloud gaming area, but generally imposing contractual restrictions on and withholding critical access from developers in the name of security and privacy. Reportedly there are 30% commissions on app sales. Blocking ‘super apps’ restricts not only developers but also users from switching to Android since they will lose use of the app.
  • Apple’s messaging systems are only partly interoperable with Android and have unique features not available on Android
  • App Store commissions and rules are prohibitive for many developers
  • Locking in consumers with features not available on Android
  • Lack of interoperability of the Apple Watch with Android phones, and other manufacturers’ watches with iPhones 

What is interesting is that in the Apple Watch charges, there’s nothing about how Apple has essentially stolen features from other developers such as AliveCor and Masimo as found in other Federal courts. That IP theft is outside of antitrust and being litigated in other courts.

Much of the heated commentary has to do with the Apple Brand Promise and how they deliver apps. Apple is an integrator and people like the ‘walled garden’. The phone ‘just works’. Quoting Alex Tabarrok in Marginal Revolution, Apple is a gatekeeper that promises its users greater security, privacy, usability, and reliability. Users trade off control for a seamless experience and it delivers. It’s desirable. However, many of us don’t need or want to give over all that much control and desire flexibility in a more open platform. Not all of us need or want ‘seamless’ features like Apple Pay and live very well without that or games. 

What will keep DOJ and Apple entertaining each other in court for the next few years are court decisions over the years that have favored Apple:

  • Monopoly has been defined in repeated decisions as market share in the 70-80% range, not 60%
  • The concept of ‘procompetitive’ means that if you can choose between open access and the Apple ‘walled garden’, Apple has a legitimate competitive feature.
  • Companies don’t have a ‘duty to deal’ with other companies
  • Apple as a monopoly has already been dismissed in other cases

The push towards the DOJ action has apparently been stimulated by the EU Digital Markets Act, which Apple will comply with, as well as Apple competitors in the US who have tried and failed to restrict Apple in integrating its services. Will DOJ succeed in forcing Apple to be more like Android? The debate will rage on. DOJ release, 88 page filing, The Verge, 9to5 Mac, Medium.com, AP, Epoch Times

DOJ and FTC finalize Merger Guidelines, deliver coal for holiday stockings and the New Year (updated)

December 20, 2023 | by

DOJ and FTC deliver a scuttle of coal for healthcare holiday stockings. The Department of Justice (DOJ) and the Federal Trade Commission (FTC) finalized the Merger Guidelines that were drafted back in July [TTA 20 July]. They update prior guidelines first issued in 1968 that have been revised six times since then. They are not legally binding but demonstrate how each agency will examine any merger or acquisition going forward–and are advance notice on how they can and will stop either. US antitrust law is based on three acts passed by Congress: The Sherman Antitrust Act (1890), the Clayton Act (1914), and the Federal Trade Commission Act of 1914, now in US Code Title 15.

After 30,000 public comments in the 60-day period, the published Guidelines are now down to 11, but in context based on this Editor’s read (caveat, not a lawyer nor play one on TV) are not materially different than the July draft of 13, perhaps considered unlucky. The language in each Guideline restates the draft language in substantially more restrictive language and interpretation. The agencies’ stated purpose is that when two companies propose a merger that “raises concerns” on one or more of these Guidelines, the agencies “closely examine” whether the effect of the merger may be to substantially lessen competition or to tend to create a monopoly (sometimes referred to as a “prima facie case”). Two “C” words are repeated throughout–concentration and consolidation. 

The guidelines are verbatim from the 51-page DOJ/FTC document (PDF link) issued 18 December and are grouped on how the agencies use these guidelines. They are effective immediately.

Distinct frameworks the agencies use to identify that a merger raises prima facie concerns (1-6)

Guideline 1: Mergers Raise a Presumption of Illegality When They Significantly Increase Concentration in a Highly Concentrated Market.
Guideline 2: Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms.
Guideline 3: Mergers Can Violate the Law When They Increase the Risk of Coordination
Guideline 4: Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market
Guideline 5: Mergers Can Violate the Law When They Create a Firm That May Limit Access to Products or Services That Its Rivals Use to Compete
Guideline 6: Mergers Can Violate the Law When They Entrench or Extend a Dominant Position

How to apply those frameworks in several specific settings (7-11)

Guideline 7: When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether It Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly
Guideline 8: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series
Guideline 9: When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform
Guideline 10: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers, Creators, Suppliers, or Other Providers
Guideline 11: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition

The Guidelines are summarized in the Overview. Section 2 explains them more completely with how the agencies apply the Guidelines. Section 3 identifies rebuttal evidence that companies could typically present, and Section 4 presents a non-exhaustive discussion of analytical, economic, and evidentiary tools the Agencies use for evaluation. 

More coal, Ebenezer Scrooge. As this Editor described the draft guidelines in July, it it is hard to see that any merger or acquisition of like companies or even complimentary organizations building out capabilities or platforms could pass. Each one of these Guidelines is a tripwire and once tripped, can trip others. Each one of these can be used by FTC and DOJ to present to a Federal district court, where decisions are now more influential than the body of US Supreme Court decisions. Healthcare Dive notes the Illumina decision in the Fifth Circuit appeals court, liberally cited in the Guidelines document. This is forcing Illumina’s divestiture of cancer test developer Grail, earlier purchased for $7.1 billion. 

So now the coal’s been delivered…what will 2024 and out look like?

  • This will freeze M&A for months as companies try to figure this out. It’s not hard to guess that the imminent publication of the Guidelines nudged the termination of the Cigna-Humana deal. Hospital and health system mergers will continue to find nothing but discouragement.
  • Watch for an acceleration of existing company failures in 2024 and disruption in the current funding structure. Smaller healthcare companies, fattened on the investment binge of 2020-21, but now betting on a buyout from a near competitor, are either going to stick it out on their own or run out of runway. VC and PE companies investing not strategically, but for the purpose of a 18-24 month exit or quick payday, will largely be out of luck. Public companies may languish unless they move quickly to profitability. This may stimulate a new look at investing–strategic investors that look at the very long term–or not. (JP Morgan in January will be verrrrry interesting.)
  • Companies that have grown organically or benefited from previous acquisitions but need to acquire capabilities for a platform to continue to be competitive will also be affected. These could trip Guideline 9 and if found to be anti-competitive, may trip Guideline 8: “If an individual transaction is part of a firm’s pattern or strategy of multiple acquisitions, the Agencies consider the cumulative effect of the pattern or strategy.”
  • The behemoths like UnitedHealth Group, Walgreens Boots Alliance, and CVS Health will have no rivals for many years. The flip side: they will have trouble making additional acquisitions without forcing divestitures, or find buyers when they wish to divest money-losing units.
  • Partnerships may accelerate–with all their risks of purloined IP and monetary disputes. But smaller companies may use it to band together without antitrust risk.
  • The SPAC (special purpose acquisition company) may make a comeback. They will not have any antitrust conflicts but risk a chancy public market, at least in the US. 
  • The conglomerate–unrelated businesses under a holding or investment company–may rise again, as it did in a tight antitrust environment in the 1960s. Remember Gulf + Western and LTV (Ling Temco Vought)–both gone? Berkshire Hathaway is a prime example of a current conglomerate. Foreign investment groups may also find US healthcare an attractive proposition.
  • Offshore reincorporation. Much as Medtronic moved its corporate headquarters from Minneapolis to Dublin, Ireland, companies may move offshore to friendlier climes like Ireland, Estonia, Hungary or the Visegrad nations, and the Channel Islands, effecting their M&A there and making their US branches operational only. 

But…there’s more. Both DOJ and FTC will be reviewing the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines. Fasten your seatbelts, it’s going to be a bumpy year. 

FTC press release (which makes clear what agency is leading!), Crowell (law firm) short analysis, PrivateFundsCFO

Additional sources added 2 January: National Law Review (article by Foley & Lardner), Healthcare Finance News