First, there is the moment when the news hits the wires: U.S. Sues Apple, Alleges Tech Giant Exploits Illegal Monopoly.

This, we know, is the beginning of a long journey: there will be months or years of filings and discovery and preliminary rulings; eventually we will have a trial, and months after that a decision. Then there are the appeals, first with three judges, then perhaps en banc, and maybe even the Supreme Court. At some point, should the government win, there will be a hearing about remedies, themselves subject to the same grinding schedule. Only then can a proper determination be made about the validity of the legal questions in this case.

Still, I think the initial moment matters: antitrust is inherently political, and tech companies are generally popular; this makes it hard to build and maintain the momentum necessary to endure the grind. One would certainly have expected that to be an advantage for Apple: the company gains power in market after market precisely by making consumers happy.

Apple’s Integration

I explained in 2014 How Apple Creates Leverage by marshaling loyal customers:

Apple is certainly not shy about proclaiming their fealty towards building great products. And I believe Tim Cook, Jony Ive, and the rest of Apple’s leadership when they say their focus on the experience of using an Apple device comes from their desire to build something they themselves would want to use. But I also believe the strategic implications of this focus are serially undervalued.

Last year I wrote a piece called What Clayton Christensen Got Wrong that explored the idea that the user experience was the sort of attribute that could never be overshot; as long as Apple provided a superior experience, they would always win the high-end subset of the consumer market that is willing to pay for nice things.

However, this telling of the story of iTunes and the iPhone suggests that this focus on the user experience not only defends against disruption, but it also provides an offensive advantage as well: namely, Apple increases its user experience advantage through the leverage it gains from consumers loyal to the company. In the case of iTunes, Apple was able to create the most seamless music acquisition process possible: the labels had no choice but to go along. Similarly, when it comes to smartphones, Apple devices from day one have not been cluttered with carrier branding or apps or control over updates. If carriers didn’t like Apple’s insistence on creating the best possible user experience, well, consumers who valued said experience were more than happy to take their business elsewhere. In effect, Apple builds incredible user experiences, which gains them loyal customers who collectively have massive market power, which Apple can then effectively wield to get its way — a way that involves maximizing the user experience. It’s a virtuous circle.

That Clayton Christensen reference was about his theory of low-end disruption, which I summarized in the aforementioned What Clayton Christensen Got Wrong:

Briefly, an integrated approach wins at the beginning of a new market, because it produces a superior product that customers are willing to pay for. However, as a product category matures, even modular products become “good enough” — customers may know that the integrated product has superior features or specs, but they aren’t willing to pay more, and thus the low-priced providers, who build a product from parts with prices ground down by competition, come to own the market. Christensen was sure this would happen with the iPod, and he — and his many adherents — are sure it will happen to the iPhone.

That Article — where I argued that low end disruption would not happen to Apple — built on a paper I had written in business school in 2010 entitled Apple and the Innovator’s Dilemma:

Steve Jobs, when asked why people want to work for Apple, said:

Our DNA is as a consumer company — for that individual customer who’s voting thumbs up or thumbs down. That’s who we think about. And we think that our job is to take responsibility for the complete user experience. And if it’s not up to par, it’s our fault, plain and simply.

This article has already laid out many of the strategic benefits of this intense focus on the user experience: it creates significant differentiation, sets customer expectations, and makes it impossible to overshoot customer needs — products are never “good enough” with regard to the user experience. From an organizational standpoint, if products are never “good enough”, then a highly integrated company is appropriate. Chrstensen and Raynor note in the Innovatorʼs Solution that the “not-good-enough circumstance mandate[s] interdependent product or value chain architectures and vertical integration.”

Another way to look at Appleʼs decisions regarding its organizational structure is to think of transaction costs: normally, in well-functioning markets, vertical integration is suboptimal. However, if transaction costs in the vertical chain outweigh the losses due to the inefficiencies of being vertically integrated, then vertical integration could be the correct course of action. Apple thinks the exact same way, but not about monetary cost; instead, the transaction costs they consider are the tax that modularization places on the user experience, and it is a cost they are not willing to bear. A central tenet is that Apple “need[s] to own and control the primary technologies behind the products [it] make[s].”

This is all a fancy way of repeating Apple’s constant refrain that their success is built upon integration — first hardware and software, then services, and now an entire ecosystem of products extending from the computer to the phone to smart watches to headphones and, most recently, a headset. This integration makes customers happy, and one would expect members of the Apple ecosystem to rally to their cause.

In fact, though, that wasn’t the initial reaction, at least in the tech world which I inhabit: the response of many people was finally.

App Store Anger

The root of tech’s frustration with Apple — including long-time Apple developers, traditionally the company’s most ardent supporters — is the App Store. The App Store is the ultimate example of Apple leveraging consumers’ desire for their products to gain power over an ecosystem; in this case, though, the ecosystem isn’t music labels or cellular providers, but rather app developers, which is to say everyone else in tech. Smartphones are essential devices, and Apple makes the best smartphone, which means their power over developers is absolute.

Apple is not afraid to exercise this power, and it’s important to note that in the early days of the iPhone the company’s control worked in developers’ favor. Apple decreed that 3rd-party apps could only be installed via the App Store, which would review every app; free apps wouldn’t have to pay anything, while Apple would take 30% of paid apps. This led to an absolute explosion in the market: consumers, who had been scarred by the 2000’s era of malware and viruses, shook off their reticence to install software and embraced the App Store, leading to an explosion of app-based businesses. An important development was the 2009 addition of in-app purchase, which unlocked entirely new business models for games in particular. Subscriptions for publications came in 2011, although it took another five years for the business model to be available to all applications.

There was, throughout this period, a continuous burbling of discontent about some of Apple’s App Store policies: one of my early Articles on Stratechery in 2013 asked Why Doesn’t Apple Enable Sustainable Businesses on the App Store?, games developers groused about the 30% fee on in-app purchases, while 3rd-party content providers suffered under an anti-steering provision that didn’t allow them to link to their website — or even tell their users — that they could start a subscription or buy content outside of the app. Everyone, meanwhile, hated the seeming arbitrariness of App Store Review, which only weighed in on an app when it was finished; good luck building something ambitious with the ever-present risk of running afoul of App Store rules.

This discontent came to a head in 2020, when a number of developers had public confrontations with Apple. Some of these were COVID-related, as Apple wanted a piece of for-pay virtual meetings; others were due to an unannounced step-up in focus on subscription-based web apps. A very public fight with Basecamp brought to light an organized campaign to force developers of all sizes to integrate in-app purchase even if they made all of their sales on their website:

That same month Apple announced App Tracking Transparency, a thinly veiled attempt to displace Facebook’s role in customer acquisition for apps; some of the App Tracking Transparency changes had defensible privacy justifications (albeit overstated), but it was hard to not notice that Apple wasn’t holding itself to the same rules, very much to its own benefit.

One year later and many developers cheered when Epic sued Apple for antitrust violations related to the App Store; I gave a list of relevant Articles a couple of months ago in The Apple Vision Pros Missing Apps:

• Apple, Epic, and the App Store, which provided a history of the App Store and Epic’s lawsuit at the time it was filed.
• App Store Arguments, which I wrote at the conclusion of the trial, explained why I expected Epic to lose, even as I hoped that Apple would voluntarily make pro-developer changes in the App Store.
• The Apple v. Epic Decision, which reviewed the judge’s decision that favored Apple in 10 of the 11 counts.

The 11th count that Epic prevailed on required Apple to allow developers to steer users to a website to make a purchase; while its implementation was delayed while both parties filed appeals, the lawsuit reached the end of the road last week when the Supreme Court denied certiorari. That meant that Apple had to allow steering, and the company did so in the most restrictive way possible: developers had to use an Apple-granted entitlement to put a link on one screen of their app, and pay Apple 27% of any conversions that happened on the developer’s website within 7 days of clicking said link.

Many developers were outraged, but the company’s tactics were exactly what I expected…Apple has shown, again and again and again, that it is only going to give up App Store revenue kicking-and-screaming; indeed, the company has actually gone the other way, particularly with its crackdown over the last few years on apps that only sold subscriptions on the web (and didn’t include an in-app purchase as well). This is who Apple is, at least when it comes to the App Store.

Here is the most important thing to understand about this entire App Store discussion — the topic that has many people who are normally skeptical of government involvement in tech cheering on the Department of Justice: basically none of it is pertinent to this case. Oh sure, the initial case filing aired all of these grievances — along with a bizarre and factually wrong assertion that iTunes was only ever on Windows because of a DOJ Consent Decree — but the actual assertions of wrongdoing barely mention the App Store at all.

The DOJ’s Case

Steven Sinofsky has a (critical) overview of the case at Hardcore Software; here is his (correct) summary of the DOJ’s actual complaints:

There are two sets of claims in the filing. The first set are written as a narrative for laypeople. The claims are broad and kind of all over the map. Before listing the specifics there is a lot of language and froth about how Apple uses its place in the market. This is the “story.” It is very exciting to read but you have to get to the actual behavior, which the DOJ claims is that “Apple has used one or both mechanisms (control of app distribution or control of APIs) to suppress the following technologies, among others” which includes:

“Supressing Super apps”

“Supressing cloud streaming game apps”

“[P]rohibiting third-party apps from sending or receiving carrier-based messages”

“[S]uppressing key functions of third-party smartwatches”

“[D]enied users access to digital wallets”

The first two are the closest the case comes to App Store complaints, and the key thing to note is that they are not relevant to the vast majority of developers. There is nothing about Apple’s 30% fee, nothing about App Tracking Transparency, and nothing about the steering provision that is, in my estimation, the most noxious of all Apple’s policies. Here is an overview of the five objections:

Super Apps

For years, Apple denied its users access to super apps because it viewed them as “fundamentally disruptive” to “existing app distribution and development paradigms” and ultimately Apple’s monopoly power. Apple feared super apps because it recognized that as they become popular, “demand for iPhone is reduced.” So, Apple used its control over app distribution and app creation to effectively prohibit developers from offering super apps instead of competing on the merits.

A super app is an app that can serve as a platform for smaller “mini” programs developed using programming languages such as HTML5 and JavaScript. By using programming languages standard in most web pages, mini programs are cross platform, meaning they work the same on any web browser and on any device. Developers can therefore write a single mini program that works whether users have an iPhone or another smartphone.

Super apps can provide significant benefits to users. For example, a super app that incorporates a multitude of mini programs might allow users to easily discover and access a wide variety of content and services without setting up and logging into multiple apps, not unlike how Netflix and Hulu allow users to find and watch thousands of movies and television shows in a single app. As one Apple executive put it, “who doesn’t want faster, easier to discover apps that do everything a full app does?” Restricting super apps makes users worse off and sacrifices the short-term profitability of iPhones for Apple.

As the DOJ complaint correctly notes, Apple has faced challenges in China because of the WeChat “super app”; it is easier to switch if all of your essential services are in one place. At the same time, I am skeptical that “super apps” — even without Apple’s restrictions — would ever become a meaningful UI paradigm in western markets long since defined by distinct apps.

Moreover, that installable apps are only available from Apple has always been a part of the iPhone’s brand promise: that is why it is important to remember the early days of the App Store and how it created consumer demand in the first place. This brand promise around security and safety will surely be a core part of Apple’s defense.

Cloud Streaming Game Apps

For years, Apple blocked cloud gaming apps that would have given users access to desirable apps and content without needing to pay for expensive Apple hardware because this would threaten its monopoly power. In Apple’s own words, it feared a world where “all that matters is who has the cheapest hardware” and consumers could “buy[] a [expletive] Android for 25 bux at a garage sale and . . . have a solid cloud computing device” that “works fine.” Apple’s conduct made its own product worse because consumers missed out on apps and content. This conduct also cost Apple substantial revenues from third-party developers. At the same time, Apple also made other smartphones worse by stifling the growth of these cross-platform apps on other smartphones. Importantly, Apple prevented the emergence of technologies that could lower the price that consumers pay for iPhones.

Cloud streaming apps let users run a computationally intensive program without having to process or store the program on the smartphone itself. Instead, a user’s smartphone leverages the computing power of a remote server, which runs the program and streams the result back to the phone. Cloud streaming allows developers to bring cutting-edge technologies and services to smartphone consumers—including gaming and interactive artificial intelligence services—even if their smartphone includes hardware that is less powerful than an iPhone.

Apple long required that every individual cloud streaming game be an individual standalone app, and frankly, I think this is the DOJ’s strongest argument: cloud streaming apps don’t pose any of the (theoretical or not) security and safety concerns of apps installed outside of the App Store; the entire point is that you don’t need to install any apps at all, so to have such a requirement seems like a clear attempt to kill competition.

To that end, one gets the impression that Apple’s January announcement that it would now allow cloud streaming services to be self-contained in a single app was a preemptive response to this filing; however, those single apps still have to include an in-app purchase option — you can’t simply offer an app that lets you sign in to the subscription you made elsewhere.

SMS and Private APIs

Apple undermines cross-platform messaging to reinforce “obstacle[s] to iPhone families giving their kids Android phones.” Apple could have made a better cross-platform messaging experience itself by creating iMessage for Android but concluded that doing so “will hurt us more than help us.” Apple therefore continues to impede innovation in smartphone messaging, even though doing so sacrifices the profits Apple would earn from increasing the value of the iPhone to users, because it helps build and maintain its monopoly power.

This entire section is pretty nuts. The core complaint is that Apple doesn’t allow 3rd-party messaging apps like WhatsApp to access private API’s for SMS; the vast majority of the complaint, though, is effectively accusing Apple of acting anti-competitive by not building iMessage for Android, and making teenagers feel bad about green bubbles. Leaving aside the fact that green bubbles actually serve a product function — they are not encrypted, while blue iMessage bubbles are — the entire idea that Apple needs to proactively build features to facilitate communication with Android flies in the face of Supreme Court precedent in Verizon v. Trinko:

Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities. Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing — a role for which they are ill-suited. Moreover, compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion. Thus, as a general matter, the Sherman Act “does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.”

I expect Trinko to be a substantial obstacle for the DOJ in this case. It is one thing to change the rules or withdraw capabilities to maintain a monopoly; there was a Supreme Case called Aspen Skiing where a company was found guilty of doing just that, but the Court drew a clear distinction in Trinko between changes in policy and never actually providing pro-competition capability in the first place:

Aspen Skiing is at or near the outer boundary of §2 liability. The Court there found significance in the defendant’s decision to cease participation in a cooperative venture. The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggested a willingness to forsake short-term profits to achieve an anticompetitive end. Similarly, the defendant’s unwillingness to renew the ticket even if compensated at retail price revealed a distinctly anticompetitive bent.

The refusal to deal alleged in the present case does not fit within the limited exception recognized in Aspen Skiing. The complaint does not allege that Verizon voluntarily engaged in a course of dealing with its rivals, or would ever have done so absent statutory compulsion. Here, therefore, the defendant’s prior conduct sheds no light upon the motivation of its refusal to deal — upon whether its regulatory lapses were prompted not by competitive zeal but by anticompetitive malice.

This also hints at how a standard like RCS could be forced upon Apple: through legislation (statutory compulsion); passing new laws remains the most appropriate way to deal with Aggregator power.

Smartwatch Integration

Apple’s smartwatch — Apple Watch — is only compatible with the iPhone. So, 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…

Apple uses its control of the iPhone, including its technical and contractual control of critical APIs, to degrade the functionality of third-party cross-platform smartwatches in at least three significant ways: First, Apple deprives iPhone users with third-party smartwatches of the ability to respond to notifications. Second, Apple inhibits third-party smartwatches from maintaining a reliable connection with the iPhone. And third, Apple undermines the performance of third-party smartwatches that connect directly with a cellular network. In doing so, Apple constrains user choice and crushes innovation that might help fill in the moat around Apple’s smartphone monopoly.

This is the part of the case that should concern Apple the most, because it is a direct attack on Apple’s core differentiation: the deep integration of software, hardware, and services across its devices. The Apple Watch has access to private APIs and system-level integrations that Apple claims provide for better battery life, messaging management, etc.; the DOJ says that these integrations should be modularized and made available to all smart watches. There is no consideration as to whether or not Apple’s claims are true, or acknowledgment that Apple’s integration was supposedly a losing proposition a decade ago: now that the company has been proven successful, said proposition is alleged to be monopoly maintenance.

NFC Access for Digital Wallets

Apple recognizes that paying for products and services with a digital wallet will eventually become “something people do every day of their lives.” But Apple has used its control over app creation, including its technical and contractual control over API access, to effectively block third-party developers from creating digital wallets on the iPhone with tap-to-pay functionality, which is an important feature of a digital wallet for smartphones. As a result, Apple maintains complete control over how users make tap-to-pay payments with their iPhone. Apple also deprives users of the benefits and innovations third-party wallets would provide so that it can protect “Apple’s most important and successful business, iPhone.”

This is a valid complaint framed in a very odd way. I think there is a case to be made that Apple has reserved NFC tap-to-pay access for itself in order to leverage its iPhone control into control of an adjacent market (digital wallets), but I have a hard time buying the DOJ’s argument that this imposes unacceptable switching costs to another smartphone. It’s also, in my estimation, fairly weak gruel for an antitrust case of this magnitude, particularly given that an integrated wallet is, once again, very much in line with Apple’s longstanding brand promise.

Apple’s Mistake

I have, for years, been urging Apple to take a different approach to the App Store, particularly in terms of non-gaming apps and the anti-steering provision, even if the company’s approach were technically legal. The danger I foresaw was not simply the loss of developer goodwill, but something even more important to Apple: its fundamental differentiation, i.e. integration. I stated the risk explicitly in 2021’s Integrated Apple and App Store Risk:

If you were to boil Apple’s philosophy and attractiveness to customers to one word, that word would be “integration.” And guess what? First party integration is bad for third-party developers — everything is a tradeoff. This is where the nuance I discussed in App Store Arguments becomes much more black-and-white. Yes, Apple created the iPhone and the App Store and, under current U.S. antitrust doctrine, almost certainly has the right to impose whatever taxes it wishes on third parties, including 30% on purchases and the first year of subscriptions, and completely cutting off developers from their customers. Antitrust law, though, while governed by Supreme Court precedent, is not a matter of constitutionality: it stems from laws passed by Congress, and it can be changed by new laws passed by Congress.

One of the central planks of many of those pushing for new laws in this area are significant limitations on the ability of platforms to offer apps and services, or integrate them in any way that advantages their offerings. In this potential world it’s not simply problematic that Apple charges Spotify 30%, or else forces the music streaming service to hope that users figure out how to subscribe on the web, even as Apple Music has a fully integrated sign-up flow and no 30% tax; it is also illegal to incorporate Apple Music into SharePlay or Shared-with-you or Photos, or in the most extreme versions of these proposed laws, even have Apple Music at all. This limitation would apply to basically every WWDC announcement: say good-bye to Quick Note or SharePlay-as-an-exclusive-service, or any number of Apple’s integrated offerings.

I think these sorts of limitations would be disappointing as a user — integration really does often lead to better outcomes sooner — and would be a disaster for Apple. The entire company’s differentiation is predicated on integration, including its ability to abuse its App Store position, and it would be a huge misstep if the inability to resist the latter imperiled the former.

Last week this danger manifested, not as new legislation, but as this lawsuit, which attacks Apple’s integration much more than it attacks the App Store. I think, though, that it was Apple’s policies around the App Store that created the conditions for this lawsuit in the first place.

In short, I suspect the DOJ doesn’t want to follow in Epic’s footsteps, but they do want to sue Apple, so they framed Apple’s defining characteristic — integration — in the most uncharitable light possible to make their case. To put it another way, the Epic case may have shown that Apple’s policies around the App Store were (mostly) legal, but that didn’t mean they were right; now the DOJ, looking for another point of vulnerability, is trying to make the case that Apple’s right approach in delivering an integrated experience is in fact illegal.

During the Epic trial John Gruber wished that Apple would relax its approach to the App Store:

What’s weirdest about Apple’s antitrust and PR problems related to the App Store is that the App Store is a side hustle for Apple. Yes it’s earning Apple $10+ billion a year, and even for Apple that’s significant. But it’s not Apple’s main business by a long shot. To my knowledge no company in history has ever gotten into antitrust hot water over a side business so comparatively small to its overall business. Apple doesn’t need this.

I think Apple’s senior leadership — Cook in particular — truly does believe that Apple has earned every dollar it generates from third-party software in the App Store, and that their policies in place are just and fair. That righteousness came out on the stand in the Epic trial. But even if Apple’s executives are correct — if the current rules and revenue splits could somehow be proven to be dialed in to a hypothetical Platonic ideal of fairness to all parties involved — that doesn’t change the fact that so many developers see it otherwise.

I don’t think the developers are wrong, but even if they are wrong, it’s not good for Apple that they’re so unhappy, and feel so aggrieved. It’s not good for Apple that developers don’t see the App Store as a platform that works in their interests. Like the Apple logo, “developer goodwill” has no price tag.

To the extent I am right — and yes, it is impossible to prove a counterfactual — the price tag of Apple’s “side hustle” is even higher than Gruber thought: I believe that if Apple had done even the bare minimum with the App Store — i.e. removing the anti-steering provision and not going after small developers with online services — it wouldn’t be in a position of having to defend what actually makes Apple Apple. It would, at a minimum, have a lot more people on its side.

I wrote a follow-up to this Article in this Daily Update.