Who will make more of an impact on Apple’s walled garden: the U.S. DOJ or the European Commission?

Conventional antitrust laws or new regulations?

For many years, it has been doubted that conventional competition law is equipped to deal with fast-changing technology markets. The EU DMA and other laws (including the proposal for an Open App Markets Act in the U.S., which got overwhelming support in committee but wasn’t put to a plenary vote) resulted from that realization.

In Apple’s case, there is a second and disparate reason for which traditional antitrust law faces an uphill battle: it’s the fact that Apple has been extremely consistent (though they’re now becoming a little less consistent in the EU) about its policies ever since the launch of the iPhone in 2007 and that of the App Store in 2008. Consistent with respect to business terms, technical rules, security and privacy and in terms of not making exceptions for particular companies (unlike the more transactional Google). Someone once called this a “static monopoly”: unlike a company that attains monopoly power and then starts to abuse it, the most criticized aspects of Apple’s behavior, which relate to iOS app distribution, have remained pretty much the same over the years, from when Apple was a new entrant to where it is today.

What has certainly changed is the price of the iPhone, and the DOJ argues in its complaint that Apple could not have raised prices so much without certain lock-in strategies as well as anticompetitive means of making the iPhone a more attractive option than Android phones (such as with respect to instant messaging). Apple is sure to present plenty of evidence that attributes those steady price increases to a variety of other factors.

The DOJ notes that “[t]hree device manufacturers, Apple, Samsung, and Google, account for approximately 94 percent of all smartphones by revenue in the United States.” Google’s market share is actually tiny compared to Apple’s and Samsung’s. To some extent, that concentration has to do with Google’s Android business model, which made it impossible for smartphone makers to profitably build Android phones unless they’re Samsung or they’re Chinese. The latter group of companies is practically shut out of the U.S. market for geopolitical reasons as well as consumer preferences. In the EU, there is a significantly greater diversity of smartphone brands.

The DOJ has now filed by far the most comprehensive and arguably ambitious case against Apple that any regulator in the world ever brought under traditional antitrust laws. By comparison, the only App Store-related decision the EC has ever made against Apple is the recent decision on Spotify’s complaint, a ruling that (after the case was shrunk) is just about anti-steering and only in the music streaming market. The EC may soon achieve a settlement with Apple of what is one part of the DOJ’s complaint (tap-to-pay services). But more than anything, the EC apparently hoped that the DMA was going to be the answer, and now it turns out that it’s not because it’s not good enough.

Initial assessment of DOJ complaint: strong on narrative, multiple bites at Apple, unclear remedies

The DOJ v. Apple litigation will last years and very likely involve appeals. There will be more opportunities for games fray to discuss that case, such as whenever Apple files a motion to dismiss or answer to the complaint. For now, suffice it to say a few things:

The only part that is purely arbitrary is the choice of the District of New Jersey for the venue. The complaint doesn’t have any argument other than New Jersey being the first-named of the U.S. states joining the DOJ. Given that California is also among the plaintiffs and Apple is based there, that would have been a more logical choice, or simply the District of Columbia. The DOJ doesn’t seem to like the case law in the relevant districts and circuits.

There is one past case, however, that the DOJ tries to leverage here as much as possible: the Microsoft case of decades ago.

From a storytelling perspective, it’s a high-quality piece of work. It explains how consumers pay the price (though many of them do it voluntarily because they’re Apple fans) and how the next round of innovation may be stifled by Apple’s monopolistic practices, though the DOJ would have had to tackle the entire Apple-Google duopoly at the same time to really make that point. Interestingly, there currently is a combined Epic Games v. Apple/Epic Games v. Google trial underway in Australia, the first app antitrust case where both are defending at the same time.

On market definition, the DOJ tries to play it safe and propose not only a smartphone but also a “performance smartphone” market. Apple’s U.S. market share is very high, but if the court adopted a global market definition, the DOJ would need to rely on the higher-priced segment of the market. That kind of segmentation is often controversial.

In terms of what the DOJ actually wants, it’s keeping all options open. Throughout the document there are references to the benefits that consumers would have from alternative app stores (also the single most important aspect of the EU DMA, though there’s not going to be much traction for rival app stores in the EU anytime soon despite the DMA’s entry into full force). But the prayers for relief don’t say the court should order Apple to allow alternative app stores. They’re more general, and there obviously would be an extensive remedy discussion if the DOJ prevailed on one or more counts.

What those dismissing the DOJ complaint as unlikely to succeed don’t really consider is that the DOJ has five distinct theories of harm and doesn’t have to prevail on each of them. From a statistical point of view, even if Apple had an 80% chance of fending off each of them (which is actually a very optimistic assumption for Apple; games fray believes it’s much harder for Apple to defend itself), that would mean the DOJ has a greater than two-thirds chance of prevailing on at least one. Of course, Apple will try to identify weaknesses that defeat the entire complaint, such as with respect to market definition, but if the DOJ gets over that hurdle and the question is whether Apple can defeat every single one of the five theories, the odds are against Apple.

Here’s a quick assessment of the likelihood of success of the five theories:

• “Super apps”: the only problem here is that such apps exist only in China. They are apps in which users can run HTML-based mini apps, giving them enormous versatility. Apple doesn’t allow them (unless forced to) because it wants total control. The “super apps” part is not unrelated to the Java part of the historic Microsoft story.
• Cloud gaming (streaming of games): Here, Apple has already started to make concessions because of regulatory pressure in different places, such as a UK market investigation that Apple thought it had already defeated until an appeals court revived it. There is, however, still the issue of the app tax Apple levies on such services.
• Messaging: This is another area in which Apple has indicated concessions, though it’s unclear how meaningful those will be. It’s an area in which Apple’s conduct is devious, and that could pose a psychological problem for Apple despite the fact that this case is not going to be put before a jury (though some class actions piggybacking on the DOJ case will be). It involves “classism”: making users of Android phones look like second-class citizens and annoying iPhone users by making messages from non-iPhones harder to read.
• Smartwatches: Apple doesn’t want iPhone users to use non-Apple smartwatches, though some other companies do the same.
• Digital wallets (tap-to-pay services): In this context Apple can’t point to Google doing the same. It also has powerful opponents in terms of banks and credit card companies. In the EU, Apple is already in the process of settling an antitrust investigation over that topic, which is a sign of weakness though it may also have to do with a decision by Apple to focus on topics where it’s more critical to maintain maximum control.

The DOJ case is not a slam dunk, but its prospects are decent.

Market power: “analysts” talk about the Epic case without even understanding in the slightest what happened there

When complex issues come up in the technology sector (which typically means competition or intellectual property matters), “analysts” from major banks or specialized firms chime in, and what they say is all too often just stupid because they don’t understand those cases.

The suggestion that the DOJ will have a hard time establishing Apple’s market power because Epic Games didn’t succeed in its case is particularly dumb because the Epic v. Apple judge said explicitly in her ruling (and the appeals court essentially said the same, but those “analysts” have probably never really read, or at least never understood, either one) that someone else may very well prove those claims, but Epic lost due to a failure of proof. Government plaintiffs have advantages, but the DOJ has the advantage that it watched the Epic litigation and has a plan for how to be more successful. And more than anything, the DOJ does not even attempt to establish a single-brand market as Epic did.

At an abstract level, the DOJ’s focus on lock-in means that large parts of the DOJ case relate to the one part that was considered by the district court and the appeals court the weakest link of Epic’s chain: customer lock-in.

The red herring about regulatory (or legislative) interference with product design

What’s also wrong is the argument that regulators and lawmakers should just leave Apple alone and allow it to design its products any way it wants, as Apple is always going to do a better job at that than politicians and bureaucrats.

Those who say so don’t consider how many technical and commercial rules a telecommunications carrier has to respect before being allowed to offer its service. There are countless regulations that automakers must respect when engineering and building cars. You can’t even operate a pizza parlor without having to obey lots of rules.

In Apple’s particular case, it’s admittedly true that the walled garden (which means restrictions on competition and on interoperability) is a cornerstone of its product philosophy. But whether private plaintiffs like Epic or governments challenge Apple’s anticompetitive antics, in the end it comes down to a very simple thing: no one even tries to prevent Apple from offering its customers its own App Store and the heavyhandedness that goes with it. It’s all just about forcing Apple to let that one compete with alternatives. If Apple’s approach is objectively superior, and if its terms are not supracompetitive, customers will flock there anyway. But then there is competition as opposed to a captive audience.

Now, in one important way all of that criticism of regulatory, legislative or judicial interference with Apple’s product design must be taken seriously: if someone wants to tell Apple what to do or not to do, one has to really understand the stuff or it’s just not going to work (and may even have negative implications for consumers).

Take the injunction Judge Yvonne Gonzalez Rogers granted Epic against Apple. It finally (after more than two years) entered into force in January. Apple announced a set of rules that Epic and an impressive array of amici curiae are now challenging (March 23, 2024 games fray article). It’s pretty obvious that the judge had a clear and simple idea when she entered the injunction in September 2021: she wanted a free flow of information about alternative options where people can buy digital goods outside the App Store without Apple levying a tax on those transactions. She wanted app makers to be able to tell customers that, for instance, something is cheaper on a Samsung phone, but also to link to the web to offer alternative purchasing options. It’s just that her ruling also says Apple is entitled to compensation for its intellectual property and may protect security and privacy, which Apple is trying to capitalize on through a web of rules that render the injunction useless.

One can’t blame the judge for a valid idea and a straightforward suggestion for how to implement it: Apple should just strike a certain prohibition. But Apple is being resilient and is capitalizing on the complexity of the situation. At the enforcement stage, Apple is going to argue that if Epic or others take issue with certain new rules, they have to challenge them in a new proceeding on the merits, not through a contempt-of-court motion. Any enforement decisions here will be appealed. Unless Apple is barred from taxing those out-of-app purchases in any way, shape or form, some kind of rate-setting will be needed and will likely go beyond what is normally done at the enforcement stage.

The problem with the U.S. injunction is not the clarity of the remedy if viewed in isolation. It’s the overall context: a decision that agreed with Apple on a lot of things.

The spirit of the EU DMA is clear, but the devil is in the details. At this point, barring some new developments that change the picture, Apple can assume that there won’t be any success stories for alternative app stores in Europe for at least many years to come. Actually, Apple is already waiting for issues (such as software piracy or privacy violations) to surface, enabling Apple to remind people of always having warned against those.

It would be a mistake to think that the EC already has a definitive plan for how to tackle Apple’s response to the DMA

There have been some articles — and there will be many more — that claimed to already know that the European Commission was going to start a DMA enforcement proceeding against Apple. Nothing is a foregone conclusion except for two things:

• EU officials can obviously see (also based on what they hear from market participants) that Apple’s rules essentially limit the DMA’s effect to app stores that will carry apps that Apple would not carry in its own store (adult entertainment, Fortnite due to the U.S. dispute, vaping/smoking) or only carries on prohibitive terms (non-fungible token transactions, where a 30% tax is totally unsustainable).
• Given that there are complaints over non-compliance, some sort of “investigation” is inevitable, but that doesn’t mean a preliminary decision to penalize or anything. It just means to conduct some analysis.

Based on conversations with very different types of sources, including some that will not be disclosed, games fray has concluded that it is definitely too early to tell what the EC will do (other than people at different levels of the organization looking into the issue). There is no reason to assume that decision makers don’t have an open mind, which includes that the situation can also change anytime as Apple intentionally presents a moving target.

Unlike some others, games fray does not subscribe to the “too important to fail” theory, according to which the DMA is a prestige project for the EU that it just can’t allow to fail to make a market impact, with alternative iOS app stores (which no other jurisdiction has mandated yet, though as mentioned above the DOJ is apparently trying to get there through litigation) being the crown jewel. The problem with “too important to fail” is that the judges at the Court of Justice of the European Union won’t view it that way. They’ll look at what the law says and what Apple does, and decide on that basis, not based on geopolitical regulatory ambitions or whatever.

One Brussels reporter games fray considers particularly knowledgeable has described, in private conversation, the situation as “Apple begging to be sued,” though in formal legal terms, what is means is that the EC hands down a decision and Apple then appeals it in court. Apart from the fact that Apple’s moving-target tactics are, in games fray‘s opinion, designed to discourage the EC from taking near-term action, it is indeed plausible that Apple feels comfortable about defending its terms in front of judges, knowing the DMA’s limitations.

It could be a mistake to believe that the EC will take the bait.

There are theories according to which something will have to happen in a matter of months or quarters, not years. But games fray has obtained reliable and credible information according to which the EC could decide one way or the other. Anything from no enforcement action (though Apple would presumably have to make some further concessions) to a conservative low-hanging-fruit strategy to a moderately ambitious to a very aggressive enforcement decision is theoretically possible.

Some Members of the European Parliament (MEPs) who played key roles in the legislative process concerning the DMA now want to see some swift and forceful action by the EC. But the EC, not MEPs, will make that decision. And the EC has to decide its course of action against the background of what lawmakers (MEPs and the EU Council) enacted in 2022. That is a huge problem because a chain is as strong as its weakest link, and in the DMA’s case, there are not only weak links but some links are simply missing. The idea was great, and there’s a lot of good stuff in there, but think of a bucket: it can be made of the best material, it can have a beautiful design, but it takes just one little hole and all the water will flow out. Here, there’s arguably more than just “one little hole.”

Those who are speculating about what may happen next look at EU competition chief (and EC Executive Vice President) Margrethe Vestager’s track record over the course of almost a decade. Interestingly, there are different views in different camps. “Progressives” with a strong desire for aggressive competition enforcement say she didn’t tackle some key issues (though to some extent that may have had to do, in recent years, with the hope that the DMA would solve a lot of problems). There are, however, also those who consider her a courageous competition enforcer who has not been afraid to take some calculated risks, such as in the Apple-Ireland tax case, where the EC achieved a spectacular turnaround after losing the first round of appeal.

Maybe she’s simply struck a balance between collecting losses (such as U.S. antitrust enforcers in recent years) and making an impact. That may have been smart and pragmatic.

Given the political landscape in Europe and a change of government in her home country, this is presumably Mrs. Vestager’s last term as an EU commissioner. But what if Apple keeps making limited changes to its rules? Apple indicated at the Monday workshop that further adjustments will happen. Everyone who knows Apple and the App Store situation can predict that there won’t be concessions that actually create a mass-market opportunity for alternative app stores. But every change means that if an enforcement decision has already been written and the situation is suddenly different, one may have to make major revisions or even start all over again. It may be part of Apple’s plan to simply delay things so that whoever may succeed Mrs. Vestager will have to make the enforcement decision.

Does the EU absolutely have to do something right here and now? Does Mrs. Vestager absolutely have to do something before leaving her current post? There are no absolutes here in games fray‘s opinion.

If a regulator brings a case shortly before a transition of power, it means the successor will be the one to defend it. One of Mrs. Vestager’s predecessors in office, Mario Monti, entered a decision against Microsoft, and his successor, “Stealy” Neelie Kroes, vigorously defended it and settled the matter with an outcome that would be unthinkable with Apple on the other side. For Mr. Monti’s legacy, that was great. In the final days of the Obama Administration, the FTC sued Qualcomm. Then Trump’s antitrust chief at the DOJ filed amicus briefs against the sister agency, and the FTC’s litigators were pursuing a case that the new Republican majority didn’t believe in. They must have felt like soldiers whom their generals would prefer to lose.

The world can see that the DMA is not opening up iOS app distribution. Companies like Meta and Microsoft don’t see how they have an actual opportunity now. Only those whose apps would not be carried by Apple are going to somehow try to make it work under the circumstances. If the EC brings a conservative enforcement action and imposes a fine of a few billion euros, it has a decent likelihood of success, but won’t change anything in the marketplace even if it succeeds, and that’s what the progressives will criticize. If the EC strikes down really hard, the fine will have to set a new record, the theories will have to be somewhat aggressive if not daring, and then Mrs. Vestager’s successor will have to defend that legacy in court.

The situation is frustrating, and except for Apple’s profitability it’s unsustainable. The iOS app distribution market must be opened up. But one must take various realities into account. This will be by far the most difficult decision in the history of EU competition enforcement. It will not be made by a case team, but by Mrs. Vestager herself, and even she ultimately needs some support from her fellow commissioners.

What is needed more than anything else is a solid strategy. Otherwise there’ll just be a tempest in a teacup: a huge announcement, but ultimately a court ruling that throws it out altotegher or narrows the scope of the deciision to the point where there won’t be anything major left. That wouldn’t benefit anyone, and for those advocating open digital markets it would actually be a dramatic setback.

This decision will be considered extremely carefully. There are multiple potential angles for enforcement, and an enforcement ruling is not even the only option. There are different conclusions that can be drawn from the current state of affairs, which is that Apple believes it doesn’t really have to open up the market despite the DMA’s recent entry into force.

Who’s better-placed now: DOJ or EC?

The DOJ’s advantage is that it has watched the Epic litigation closely. Despite the fact that U.S. antitrust law has been weakened over the past few decades, the DOJ at least knows what the framework is. It’s not going to be easy for the DOJ to succeed, but for the reasons described further above, there is a reasonable likelihood of at least something coming out of that case.

The DMA is a new law, and if the first enforcement action targets Apple, then that will also give rise to the first major court ruling based on the DMA. The glaring deficiencies of the current DMA make it more difficult for the EC to develop an enforcement strategy that is neither too timid nor delusional than it was for the DOJ to identify some attack vectors under U.S. antitrust law.

The EC now has a high-profile piece of legislation to enforce, but it’s not going to be easy. The DOJ faces far less pressure in terms of external expectations than the EC. If it loses the case against Apple, that won’t look great, but they can say they’ve at least tried. The EC needs something more to show than “we’ve at least tried.” But how?