Quantfury Gazette

US takes stand for innovation with antitrust lawsuit against Apple (NASDAQ:AAPL)

by
Nathan Crooks
Quantfury Team
Apple

The US government accused Apple (NASDAQ:AAPL) last week of making it harder for Americans to switch smartphones, using an 88-page antitrust lawsuit to portray the tech giant as a scheming monopolist continuously plotting to keep users hooked on its expensive iPhone. But it might not all be bad news for the company. Any outcome in the case is far from certain, and even if Apple loses, there could still be an upside for investors. 

The ordeal is reminiscent of an antitrust case the government brought against Microsoft (NASDAQ:MSFT) in 1998, in which it accused the company of using its dominant position in an attempt to consolidate power over internet browsers, the emerging tech platform of the time. A quarter of a century later, the Department of Justice wants to free the smartphone platform it says is at similar risk of stagnation and ossification.

“Consumers should not have to pay higher prices because companies violate the antitrust laws,” Attorney General Merrick B. Garland said, referring to legislation that’s designed to protect free competition in the economy by preventing companies from restricting trade. “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.”

At the heart of the DOJ’s lawsuit against Apple is the allegation that the company responds to competitive threats by “making it harder or more expensive for its users and developers to leave than by making it more attractive for them to stay.” The agency details the “shapeshifting rules and restrictions” the company employs in its App Store guidelines and developer agreements “to extract higher fees, thwart innovation, offer a less secure or degraded user experience, and throttle competitive alternatives. It specifically calls out the company’s efforts to suppress and control developments centered around so-called “super apps,” cloud streaming game apps, messaging apps, smartwatches, and digital wallets.

The government paints a picture of Apple as a mature villain, living off the fat of an ever more expensive iPhone, which was first unveiled in 2007 and now holds more than 60% of the US market. The lawsuit notes that the first model cost $450 in inflation-adjusted dollars compared to the top model today, which is priced at nearly $1,600. It also highlights the fact that Apple returned $77 billion to investors in the form of share buybacks in 2023, more than double the $30 billion spent on research and development that year. That’s a telltale sign of a company that can’t find anything better to do with its cash. Even with all those buybacks, which tend to boost share prices, the company was the worst-performing stock last year of the so-called “Magnificent 7” tech companies including heavyweights like Amazon (NASDAQ:AMZN), Meta (NASDAQ:META) and NVIDIA (NASDAQ:NVDA). Innovation is what produces alpha, not dividends and buybacks. 

Amid recent reports that Apple has suspended development of a decade-long electric car project and apparently missed the boat when it comes to the development of large language models to power new AI features, the lawsuit further strengthens the characterization of Apple as a company that has strayed from its roots as an innovator under CEO Tim Cook. Each new update to the increasingly brick-like iPhone may bring a better camera or faster processor, but the company has struggled to reinvigorate the category with features customers want, such as a foldable model.

“Under our system of antitrust laws, ‘good enough’ is, quite simply, not enough,” the lawsuit states. “Competition is what will ensure that Apple’s conduct and business decisions do not thwart the next Apple.”

Indeed, the most interesting aspect of the lawsuit is the way that the DOJ credits Apple’s success to the very charges it brought against Microsoft more than 25 years ago that ultimately “created new opportunities for innovation in areas that would become critical to the success of Apple’s consumer devices and the company itself.”

“In the absence of the consent decree in United States v. Microsoft, it would have been more difficult for Apple to achieve this success and ultimately launch the iPhone,” the lawsuit stated. Apple’s success, in other words, can directly be tied to the DOJ’s efforts to force Microsoft to open up its platforms to competition.

It’s fair to say that the DOJ will undoubtedly face a battle in court, and good lawyers should be able to argue against much of the government’s technical logic. Most importantly, proving that Apple has a monopoly will be hard. While it has most of the US market share, that sinks to just 23% globally. IPhones are premium models that people who can spend more tend to prefer. No one forces anyone to pay that premium or any user to stay in the ecosystem. There are other options, and everyone knows that. 

Apple can draw lessons from Microsoft, which eventually settled with the government. Perhaps the most significant impact of that case was that it ultimately paved the way for co-founder Bill Gates to step down as CEO. The company got back to innovating, even as Apple rose to power. Microsoft’s recent emergence as an AI powerhouse should reassure any Apple investor worried that the company’s golden goose could be about to crack. Since Microsoft settled with the government in 2001, its shares have returned more than 1,100%. There’s an argument to be made that the DOJ’s case against Microsoft benefited the company in the long run by making the entire industry more dynamic. It may now be doing the same thing with Apple. 

The DOJ’s lawsuit against Apple can be best seen as a defense of future innovation that will plant the seed for the next big platform and round of exponential growth, wherever it comes from. If the company listens, Apple might just be able to become the next Apple, and that’s exactly what its customers actually want anyway. A sticky App Store that generates hefty fees and keeps users locked in is a great way to run a mature utility company, but it’s no way to run a preeminent tech one.

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