News & Thinking

Is Apple’s “Walled Garden” anti-competitive? The US Department of Justice thinks so.

Contributed by:

Lucy Scott
Senior Assc

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Lucy Scott

Helena Goldsmith

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Helena Goldsmith

In March this year, the US Department of Justice (DoJ) filed a landmark civil lawsuit accusing Apple of an illegal monopolisation of the smartphone market in violation of federal antitrust law. At the heart of this case is the boundary between anti-competitive monopoly behaviour and (legitimate) vertical integration.

Why is the US Department of Justice suing Apple?

The DoJ claims that Apple dominates the US smartphone market with a market share of over 70% when measured by revenue, which is well over the thresholds for demonstrating market power. When measured by units shipped, the market share sits closer to 64% which is still considerably ahead of the second largest smartphone manufacturer, Samsung, at 18%.

While it is not illegal to hold a monopoly in the market, it is illegal to take advantage of that monopoly. The DoJ claims that Apple has maintained monopoly power by using its control of the iPhone to illegally limit competition, locking in consumers and keeping smartphone prices high.

Notably, the complaint alleges that Apple’s anticompetitive conduct has ramifications beyond the smartphone market impacting other industries such as “financial services, fitness, gaming, social media, news media, and more.” The DoJ claims that if Apple’s market power is not managed then it will likely expand into other markets.

What is Apple’s alleged anti-competitive behaviour?

The DoJ claims Apple has engaged in the following anti-competitive practices:

  • blocking all in one “super apps” which provide multiple functions within one place (like WeChat, for example) from being available on the App Store and functioning on the iPhone;
  • reducing the appeal of rival products by limiting the functionality of non-Apple smartwatches when paired with iPhones as well as the functionality of Apple products when paired with non-Apple smartphones;
  • suppressing rival cloud streaming apps;
  • limiting third party digital wallets; and
  • exclusive availability of apps such as iMessage and Facetime on Apple devices undermining the ability of iPhone users to engage with owners of other smartphone brands.

The lawsuit seeks to end these alleged anti-competitive practices and act as a warning to other Big Tech companies that they must compete and innovate rather than reinforcing artificial barriers to competition.

The DoJ has not ruled out structural relief in its lawsuit. If successful, the US Federal Government could call for the breakup of Apple – reminiscent of the outcome of its landmark antitrust case against Microsoft 20 years ago.

Vertical integration or anti-competitive behaviour?

The lawsuit has faced criticism from legal experts who note that companies are legally allowed to favour their own products. For example, if a camera manufacturer produces lenses that only work with their cameras, that is vertical integration as opposed to anti-competitive conduct. It is hoped that the lawsuit will provide clarity around the point at which vertical integration becomes anti-competitive.

How is this relevant to New Zealand?

Changes made last year to section 36 of Commerce Act 1986 expanded the prohibition on misuse of market power, which applies to any business with substantial market power. Although the Commerce Commission has been slow to act on alleged monopoly behaviour in the past, because of perceived difficulties under the previous law, we expect more action going forward under this revitalised prohibition. In light of the legislative amendment, the Commerce Commission issued new Guidelines on Misuse of Market Power which indicates a stronger approach. Therefore if Apple was based in New Zealand, the alleged anti-competitive behaviour may be investigated under section 36 of the Commerce Act.

At this stage, it is unclear what the implications of US v Apple will be as the case is likely to be strongly defended, and span years before reaching a resolution. However, this will be a space to watch for Big Tech and consumers alike.

How we can help?

Our team has experience advising on competition issues and can provide you with guidance or assistance if you are concerned about compliance under section 36 of the Commerce Act.

For a confidential discussion on competition issues, please get in touch.