The United States vs. the iPhone

From The New York Times, I'm Sabrina Tavernise and this is "The Daily."

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Last week, the Justice Department took aim at Apple. It was the latest and most sweeping in a series of anti-monopoly cases against the Titans of Silicon Valley. Today, my colleague David McCabe on "The United States versus the iPhone."

It's Tuesday, March 26.

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So David, there was big news last week out of Washington, and that was that the US government filed suit against Apple. And this is just one in a series of cases that the government is making against big tech. The last time you and I talked, of course, Google was the one that was going on trial. So tell me about this case against Apple.

So for five years, the federal government, through the Department of Justice and the Federal Trade Commission, has been pursuing these investigations and ultimately bringing lawsuits into whether the biggest tech companies have broken antitrust laws. And these are laws that are designed to stop companies from throwing their power around. And they have brought a spate of these lawsuits.

They sued Google for abusing monopolies in online search and advertising technology. They've sued Meta which owns Facebook for allegedly stamping out nascent competition when it bought Instagram and WhatsApp. And the government sued Amazon for allegedly squeezing the third-party merchants that use its site.

And while the individual allegations in each one of these lawsuits varies, the basic argument is this, that these companies have illegally maintained monopolies or otherwise subverted competition, that it's been bad for the economy, it's reduced choices for consumers, it's limited innovation, and it's led to higher prices. And last week, the Justice Department filed one of these lawsuits against Apple. And this lawsuit is, in some ways, the most sweeping we have seen yet.

It targets what is one of the most valuable companies on the planet. Apple is worth trillions of dollars. And it takes aim at the heart of Apple's business, a product that is recognizable to billions of consumers around the world and has changed daily life as we know it, and that's the iPhone.

So David, the last time we talked, you taught me that simply being a monopoly in and of itself is not illegal. If lots of people like a company's product and it ends up as a monopoly because of that, that's OK. But if the company uses its power of bigness to keep competitors out, that's when a company crosses into the illegal territory. So what are we seeing the government argue here?

That's right. If a monopoly is maintained through exclusionary or predatory means, that's when a company starts to violate the law. And that's exactly what the government is arguing Apple has done here. And particularly the theme that they've hit on again and again is exclusion. That Apple excluded other companies from offering products that compete with its own services or excluded other phones or devices from interacting with the iPhone in a way that was really good for consumers, and that those things were designed to make a consumer more reliant on the iPhone and make it harder for them to switch away from the iPhone, and that all of these things built what the Justice Department is calling a moat around the iPhone.

A moat, like a moat around a castle?

Precisely, yeah, filled with alligators, drawbridge, the whole deal.

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OK, so give me a better sense of this metaphor.

So think of Apple as a medieval lord of some kind. Apple's got its castle. In the castle is the crown jewel, the iPhone and also all the people who use the iPhone because that's the heart of Apple's business, all the people using the iPhone, using the services Apple sells you through the iPhone.

And around the castle is this deep moat with the alligators. The drawbridge is pulled up. And the moat makes it hard to get out of the castle. It also makes it hard for competitors to get in and get at those users.

Got it. So that metaphor is clear. So what exactly does the DOJ allege?

So the first thing the government argues Apple does to build this moat is it simply doesn't allow other companies to offer apps on the iPhone that might diminish the value of the phone to users. And there are a number of examples in the lawsuit about this. But the first one that really matters is digital wallets. So it has become increasingly common for consumers to pay for something, like let's say you go to a coffee shop to pay by tapping their phone against the little payment terminal rather than taking their credit card out.

On the iPhone, only Apple is allowed to provide a digital wallet like that. It's called the Apple Wallet. And the Department of Justice is saying that they don't allow other companies to offer that kind of service because it might reduce Apple's hold on iPhone users and make it less costly for those users to switch to a different phone and take their digital wallet with them. So that's one example.

And by less costly, you mean it will be easier to switch out of an iPhone.

Exactly. Another way the government says Apple built its moat is by not allowing users to download game streaming apps.

What's a game streaming app?

A game streaming app lets you play a video game like you're watching a show on Netflix. Instead of downloading the game directly to your phone, you play it on a remote computer far away from you.

So streaming video games basically.

Exactly, streaming video games. And the government says that if iPhone users were allowed to stream video games, that it would make the phone less valuable to them. Because the iPhone has a really powerful computer chip, it can play games directly on the phone. But if game streaming makes that unnecessary, the government says why would they need the expensive, powerful iPhone in the first place?

Got it. So basically trapping them in this more expensive environment than is needed for this gaming thing.

Exactly.

So what else is the government alleging here?

The government says that Apple has also built its moat by making sure that the iPhone doesn't work very well with other types of devices that aren't made by Apple. And there's two examples of this.

One is the smartwatch.

So Apple makes a device called the Apple Watch. It's very popular. It tracks people's fitness. It lets them respond to notifications and send text messages directly from their wrist.

People's wrists are beeping all the time now.

Exactly. But other companies make smartwatches too. And the government says that the iPhone works less well with those other devices not made by Apple than it does with the Apple Watch. A prime example of this is that users can respond to notifications directly on their Apple Watch. If they're using a non-Apple smartwatch, they can't do that in the same way.

And the government says that that's all an attempt to make it harder for people to leave the iPhone. Because once they own the expensive Apple Watch, they're not going to want to switch phones and the watch. That would be much more costly, hundreds of dollars more costly.

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The next example is messaging.

Right, the green and the blue like someone doesn't have an iPhone basically.

Exactly. So I have an iPhone. And if I'm talking to someone who also has an iPhone and Apple's messaging app, the messages are blue.

There are things like an indicator of when one of us is typing. The videos that we send are really rich. The conversation is encrypted by default, which makes it more private.

But if I'm talking to someone who has an Android, their messages are green. You don't have things like that typing indicator. The videos can be more pixelated, the government says. The conversation isn't encrypted.

And the government says that Apple has designed this dichotomy, the green bubble, blue bubble dichotomy, in order to create a stigma around phones that are not the iPhone, suggests their lower status, and that indeed non-iPhone users suffer from a social stigma because they don't have an iPhone. And the Department of Justice says that this is particularly acute for teenagers and presents data that 88 percent of teenagers say their next phone will be an iPhone. And the government quotes someone at Apple saying that making messages compatible or more compatible across types of phones would just open the door to iPhone families giving their kids Androids.

Interesting. So David, I have to tell you, this is the point in the episode where I admit to you that I do not have an iPhone.

I have an Android phone and maybe I suffer from social stigma. I'm one of those green messages in your phone. In fact, I think I was this weekend.

But I guess it was about five years ago, I just stepped out of the castle and swam across the moat. And it actually wasn't that hard. So I guess I'm wondering, how the DOJ is saying that this actually harms consumers if you can just leave like I Did What's the actual harm?

Well, first of all, the statistics suggest switching rates are relatively low from iPhone to Android. That relatively few people have an iPhone and then they go and buy an Android.

So you're saying, first of all, Sabrina, you're weird.

Not weird, but perhaps statistically anomalous.

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So while data suggests that not that many people switch, the government is saying that Apple has a durable monopoly over smartphones in the US. They're saying that by revenue, Apple has a more than 65 percent share of smartphones generally and a more than 70 percent share of what they call performance smartphones. So think about high-end devices from companies like Apple, or Google, or Samsung.

And then because Apple has built this very effective system, this effective moat for maintaining that monopoly, that it does not have to compete with the Samsungs and the Googles of the world in a full-fledged way. And that the way that harms consumers first and foremost is because they don't have to compete on price. That they can continue to charge high prices for the iPhone because there is an absence of competition here.

So essentially, the government is arguing that Apple, by dint of having this, what it calls monopoly, this captive audience basically, is charging more to consumers.

That's right. And the government argues that there are other harms too, ones that might be a little less material, but that Apple's monopoly might harm the possibility of future innovations. That they're not allowing companies to go create and offer an iPhone cloud gaming service. That they're not allowing companies to go and create an awesome digital wallet for the iPhone. That effectively, they're making it impossible for companies to go out and invent new good things for consumers.

So the government offers one idea here, which is you could imagine another company, let's say it's a bank or Venmo, would offer its own digital wallet on the iPhone and could offer a benefit to users like cash back every time they use that digital wallet. And if you play that out, there could be a competitive process where Apple offers its own rewards to get people to use the Apple Wallet. But what the government argues here is that basically that whole process of competition that leads to new benefits for consumers has been short circuited by Apple when it denied the ability of other companies to put their own digital wallets on the phone.

Because the companies who would be inventing those new good things can't go to the main platform they'd be selling it on because they're blocked.

Right, that they're denied from accessing that product to a big part of the market and so it's not worth doing.

So David, just listening to you lay all of this out, it really seems like Apple is doing what every company tries to do, which is to make it hard to leave their own products and switch to a competitor's products, keeping itself sticky. But I guess I'm wondering, is that actually illegal? Isn't that just smart business?

Well, and that will be the question for the judge who is hearing this case.

They will have to look at the arguments laid out by the DOJ, at the arguments laid out by Apple, and figure out, did this cross a line from simply aggressively competing to something that was against the law? And all of these cases come down to two stories, one that the government tells about a company that has perniciously stepped over the line and one the companies tell about how in fact they're providing benefits to consumers and competing fairly. And Apple already tells a very different story here. It says that what the Department of Justice presents as this evil moat around the iPhone, that bundle of practices, are, in fact, one of the company's greatest strengths.

We'll be right back.

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OK, so, David, you just said that Apple is arguing that its defenses, this moat that they've built that the government is arguing is unfair and illegal, is actually one of its greatest strengths. So tell me about that. What is Apple saying exactly?

Apple is saying that these steps that it's taken that the Department of Justice is painting as illegal are, in fact, designed to create an experience that consumers love and that keeps them safe. A major argument for Apple is that a lot of these practices are good for security. And you've probably noticed that Apple has marketed itself as a more private option, a more secure option. They run ads about the privacy of the iPhone. They've gotten into a big fight with the government over encryption in the San Bernardino shooting several years ago.

I remember this. The FBI actually got the guy's phone, the phone of this mass shooter, but then couldn't get into it because the encryption software was so strong on the iPhone.

Exactly. And Apple is saying that that commitment to security lives in a lot of these practices that the government is targeting. A great example is the wallet. So the way they exclude other companies from making digital wallets is they don't let them access the physical chip that interacts with the technology at the coffee shop to make the payment. And Apple says they don't do that because they want to create the safest and most secure experience for users when they go to pay for their coffee with their sensitive banking information.

But more broadly, the argument that Apple is making here is that all of these practices to control the system around the iPhone, to control the experience for users on the iPhone, it's about creating a magical experience for iPhone users where everything works together. And Apple is saying that users love the end result. They love this experience and that Apple is going to defend that experience from government intervention.

So Apple is basically saying, look, they're not trapped. They can leave any time they want. They want to be here.

That's right. And they want to be there because they love their Apple products.

They want an iPhone.

Right, exactly.

So what about the top line argument the DOJ is making that Apple actually has an illegal monopoly on smartphones, that Apple has cornered the market?

So Apple says that's just not true. So you may remember, the Department of Justice is arguing that Apple has by revenue in the United States more than 65 percent share of the total smartphone market. Apple says, no, no, no, the way to understand this is it's a global market.

Because outside the United States, iPhones are far less popular, Androids are more popular. And so Apple is saying, if you count the whole world, we have about a 20 percent share of the smartphone market. We don't have a monopoly at all.

Oh, interesting. So Apple is saying, look, you've got the wrong universe. The universe, not the United States, the universe is the world. That's where we're competing.

Right, that's exactly what they're saying.

So David, how do we think this is actually going to go for Apple? It's been in court on some of these issues before. So what do those cases tell us?

What they tell us is that Apple fights back hard. And when it does make changes, they're largely around the margins of the business. They've not radically changed their business in response to government pressure or pressure from court cases. So there's a couple examples of this.

One really contentious point over the last several years has been that the only way for a developer to get their app onto the iPhone is to sell in Apple Store. And if you sell in Apple Store, once you offer some in-app purchase, imagine a subscription or some other digital good that you buy in the app, you have to use Apple's payment system, which takes a commission as high as 30 percent.

Now, Apple has a new high-profile lawsuit on its hands.

The game developer Epic Games has filed a lawsuit against Apple.

And so Epic Games —

Epic Games, they make Fortnite. And Fortnite is hyper popular —

— which makes the very popular game Fortnite, sued Apple. And they alleged that this whole system was anti-competitive.

Now, the legal complaint seeks to establish Apple's App Store as a monopoly.

Apple says, you can't go around our system and buy directly from Epic Games, from Fortnite. You have to buy through us.

They were trying to basically bypass the payment system, not pay that potentially as high as 30 percent commission.

Well, Apple stock tumbled a little over 3 percent today after a judge's ruling in the company's court battle with Fortnite.

And the judge in the case did require Apple to ease some of its restrictions on app developers.

Under the ruling, app developers will now be allowed to send users to other payment systems.

But it wasn't all bad for Apple.

But the judge didn't make them abandon their business model entirely.

The judge also sided with the tech giant on every other key point in the case.

So that's kind of a win for Apple although slightly mixed one.

Apple did make changes, but they didn't have to abandon the golden goose entirely. Another example is in Europe where —

The company faces fresh charges from the European Commission over its App Store practices.

The European Commission fined Apple 1.8 billion euros in early March for allegedly thwarting competition among its music streaming rivals. And this was driven by complaints from companies like Spotify, which say that Apple exerts an unfair amount of control over the relationship that they have with their consumers.

The competition commissioner said the company had, for a decade, abused its dominant position in music streaming apps.

But it's an example of Apple fighting back. They say they're going to appeal this fine and it's expected that process will go on for some time.

So this is again rivals alleging that Apple is abusing its privileges and bigness with the App Store. And this is being investigated by the European Union.

Exactly. The pattern has been relatively clear over and over again. Software developers have accused Apple of taking onerous fees and applying unfair policies to their businesses.

Apple has fought back. When Apple has lost those fights, they've agreed to make minor concessions. But often they have continued to push back and continued to fight.

Now, all of this, of course, is the App Store we've been talking about, that's not the DOJ case. the DOJ case is much bigger.

That's right. So effectively, the aggressive control that Apple exerts over app developers that Spotify and Epic Games have been arguing about, the government is saying that Apple uses that control in all kinds of different ways to build this moat that protects the thing it really cares about, the iPhone. And it's probably worth noting here that Apple says that they are changing some of the practices that are laid out in this lawsuit, that they're going to make it easier for messaging apps on different phones to talk to each other and become more permissive for gaming apps. But it's unclear how those changes might impact the case.

David, how much of an uphill battle does the DOJ face here? I'm thinking back to the case we talked about against Google and it did seem like quite a climb for the DOJ to actually prove its case against this tech giant.

Proving these cases is difficult. And you're dealing with a company with almost limitless legal resources. They're going to fight back hard.

And it will take a long time. These cases usually drag on before trial for multiple years. Apple is expected to file a motion to dismiss the DOJ lawsuit.

So that will provide an early sense of how strong the case is. But the truth is the current leadership of the Justice Department may not be in place when this case finally goes to trial. So they filed something that may well outlive them.

And how does that political change affect the case? Presumably they'll continue it.

Well, a new administration could do what they wanted to with the case. This investigation started under a Republican president so it's possible a new administration would keep things going. But they could also settle with Apple or withdraw the case. All those things remain options as they go to trial.

Got it. And what is the DOJ's dream scenario here? What does it want to have happen with Apple?

So the Justice Department has asked, first and foremost, for the court to stop them from doing the things described in the lawsuit, stop them from excluding certain types of apps, or making certain products less compatible with the iPhone than Apple's own products. But the devil will really be in the details of the judge's ruling. If the judge rules that Apple broke the law in a lot of different ways, that may influence how the Department of Justice ultimately asks the judge to fix matters in this case.

So they could ask for changes to Apple's behavior. They could ask for changes to the structure of Apple. But they really are holding their cards fairly close to the vest while they wait to see how a court rules on the substance of the allegations.

So David, I just want to step back here for a second and really think about what the government is doing here. It's taking one of the single-most valuable companies in the world and is trying to fundamentally change the way that company operates. That strikes me as a potentially risky thing to do. It could be very damaging to this valuable American company, and as a result to the US economy.

Well, the government says that it's worth it. That enforcing the competition laws in this country is good for the economy. And they've really leaned on the Justice Department's long litigation with Microsoft at the turn of this century.

Basically, they've been arguing that Microsoft would force to allow things like Apple's own iTunes product onto Windows. And as a result, it opened the door for Apple to build this whole ecosystem that resulted in the iPhone. So what the government believes is that, yes, they are accusing a major company of wrongdoing, but that in doing so, they will open the door to innovations that we can't even conceive of.

So there would be a net benefit for both American society and for the economy.

Right.

But David there's an interesting tension here. Of course, the government is arguing that all of these things are in service of a better, brighter future in the American economy, but a lot of people would say they choose Apple products because they like them better. They like Apple's ecosystem.

They like being in the castle. So I guess there's a real contrast there with what the government's trying to do. Because, fundamentally, at the end of the day, this company is quite popular with consumers.

Well, and the government presents itself, first and foremost, as a law enforcement agency. That here is a company that, regardless of how popular its products are, has broken the law and needs to be held to account. But this is a really fascinating moment for reasons that go beyond any one case. Think about what's happening here. The government has filed lawsuits against the biggest defining American tech companies of our era and it's promising that this will lead to an era of new innovation, of better choices for consumers, even lower prices. And now we're going to see whether or not they were right. And consumers will see it in the way that these products change in the way that this industry, which defines so many aspects of American life, operates going forward.

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David, Thank you.

Thank you for having me.

We'll be right back.

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Here's what else you should know today.

I shall put the draft resolution to the vote now.

On Monday, the United Nations Security Council passed a resolution calling for an immediate ceasefire in Gaza, breaking a five-month impasse in which the United States vetoed multiple calls for a halt to the fighting. The US abstained from the vote, allowing the resolution to pass.

The result of the voting is as follows — 14 votes in favor, 0 votes against, 1 abstention.

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The draft resolution has been adopted as resolution 2728, 2024.

The US faced immediate criticism from Israel's Prime Minister Benjamin Netanyahu, who canceled meetings in Washington between an Israeli delegation and US officials, a public rebuke to President Biden who had asked for the meetings. And President Vladimir Putin of Russia acknowledged for the first time that the bloody assault on a concert hall near Moscow was executed by, quote, "radical Islamists." However, he continued to assert that Ukraine probably played a role. Putin said that the tragedy was likely ordered by Ukraine, asserting that the assailants were on their way there after their attack and saying, quote, "The question is, who benefited from it?"

Finally, Donald Trump is all but certain to become the first former US President to stand trial on criminal charges after a judge on Monday denied his effort to delay the proceedings. The trial, in which Trump will be accused of orchestrating the cover up of a sex scandal surrounding his 2016 presidential campaign, will begin on April 15. Today's episode was produced by Carlos Prieto, Mooj Zadie, and Eric Krupke with help from Summer Thomad. It was edited by Liz O. Baylen, contains original music by Brad Fisher, Dan Powell, Marion Lozano, Diane Wong, and Elisheba Ittoop, and was engineered by Alyssa Moxley. Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly.

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That's it for "The Daily." I'm Sabrina Tavernise. See you tomorrow.

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