When the U.S. Justice Department announced its antitrust case against Apple five weeks ago, it went all out. Attorney General Merrick Garland led a lavish press conference, and the case was openly compared to the historic Microsoft lawsuit from thirty years ago, which almost resulted in the company’s forced dissolution.
The news was met with a shrug by investors; since the DOJ press conference, shares of Apple Inc. AAPL, +5.98% have increased by 1%, while the S&P 500 index SPX has declined by 3.8%, according to FactSet. The “Magnificent Seven” stock has dropped roughly 7% from its record close in December, but it still has a high price-to-earnings ratio of 30.9, which indicates that investors think the stock has a bright future.
After-hours trading saw Apple shares rise 6% as a result of Thursday’s earnings report, which set the stage for another rally.
However, those who have minimized the DOJ’s lawsuit in the United States might be missing the bigger picture. Apple is currently facing almost unheard-of antitrust actions in a number of global jurisdictions, including Europe and Japan. Its aggressive regulatory strategy could cause the company to lose focus and deplete its resources, ultimately compelling it to alter its business model and reduce margins.
Gil Luria, a software analyst at D.A. Davidson, told BourseWatch, “The scope of regulatory action against Apple is global, and one of the important things to note is that different regulators are going after different parts of Apple’s business.”
Apple said it would not comment.
The Digital Markets Act of the European Union, which became operative in 2023, governs messaging services, app stores, and search engines—commonly referred to as digital gatekeepers. Apple is required by law to act as a gatekeeper, which means that it must permit rival app stores to function on Apple devices, such as iPhones, and permit app developers to take direct payments from iPhone users.
Read more: This year’s Big Tech regulatory crackdown begins with the EU’s historic antitrust fine against Apple.
The company was fined nearly $2 billion for violating antitrust laws by stifling competition in the music-streaming app market, following an EU antitrust ruling that precipitated the designation.
This is a threat to Apple’s services revenue, which is its fastest-growing sales segment and its second-largest revenue source after the iPhone, according to Luria.
The Justice Department’s lawsuit targets Apple’s primary revenue stream, the iPhone. The government claims that Apple has unlawfully erected obstacles in the way of consumers switching to less expensive or otherwise more alluring smartphones. These obstacles include outlawing cross-platform payment apps that would facilitate the transition from an iPhone to a different device, blocking game apps that stream data to the cloud, lowering the quality of third-party messaging apps, and banning so-called super apps that combine multiple functions into one application.
Legal professionals assert that Europe presents a far greater threat to Apple than the Justice Department because of its well-established tech laws, severe fines, and streamlined appeals procedures.
“Europe is not hesitant to levy huge fines, and it has an abusive dominant position in determining if a company harms competition,” stated Alden Abbott, a former general counsel for the Federal Trade Commission and current senior research fellow at the Mercatus Center at George Mason University. “Billions of dollars’ worth of fines will be incurred if the EU drags this out.”
However, Abbott noted that the DOJ will find it extremely difficult to continue due to US monopoly law.
“Justice will attempt to draw comparisons between the Apple Watch and messaging services, and the Microsoft claim that it was deteriorating the functionality of third parties and IE,” he stated. Apple will claim that it gives users more access to its software. Apple will counter that these arguments are out of date.
Abbott estimates that Apple has a 60% chance of winning the antitrust battle, which he anticipates will last for years.
Rebecca Haw Allensworth, a Vanderbilt University antitrust expert, stated in an interview that “it’s an uphill battle for DOJ.” Apple possesses both the public’s and the government’s antitrust opinions. Apple, its supporters, and a large portion of the market think that the company is correct because of its excellent products. With developers, Apple may be doing things incorrectly. Based on what the general public thinks, Apple is doing well.
From accusations that it monopolized the digital music download market to the more recent legal dispute with Epic Games over its app store policies, Apple has won numerous cases involving antitrust issues in recent decades. Another victory would come from a court ruling in favor of the company.
Even if Apple prevails in court, the DOJ case may have far-reaching effects, such as indicating to American allies that suing US tech giants for antitrust violations is a legitimate tactic.
The Japanese Fair Trade Commission has the authority to fine Apple up to 20% of its Japanese revenue for not allowing competing app stores to function on its phones, thanks to new legislation that was advanced by the cabinet last week. This legislation will replicate the EU’s DMA regulations for smartphone operating systems.
The legislation, which the ruling Liberal Democratic Party hopes to pass in the current legislative session that ends in June, is allegedly the target of Apple’s lobbying efforts against Japanese lawmakers. Only after the DOJ presented its case and Prime Minister Fumio Kishida met with President Joe Biden on April 10 did the LDP proceed with the bill.
In addition to these legal battles, Apple is also facing an antitrust investigation in Brazil, possible fines for antitrust violations in the Netherlands and South Korea, and legislation on the European model that Australia and Britain are considering introducing could negatively impact Apple’s service margins in those markets.
In response, Apple has resisted any and all attempts by governments to alter operating system features. This is a time-consuming tactic that might divert the attention of the company’s leadership from other objectives, such as innovation.
In a recent research note, Bloomberg Intelligence analysts Jennifer Rie and Anurag Rana stated, “Apple has held fast against antitrust challengers thus far, but it’s possible the continued complaints about its policies and conduct, legal challenges in the U.S. and abroad, and now a major DOJ lawsuit will take their toll on the company sooner rather than later.”
They continued, saying that fighting the lawsuits would take time and resources, divert attention from the company’s regular activities, and possibly weaken Apple’s competitive advantage.
Congress might still impose changes on the business even if the company wins the DOJ lawsuit, particularly if Apple’s concerns about the consequences of EU regulations prove to be unfounded.
Both Apple and the DOJ have cited the Microsoft MSFT, +2.22% antitrust case as an example. However, Apple might want to take a cue from Microsoft’s 2002 settlement, which involved growing its presence in Washington and collaborating with legislators to create regulations rather than adopting a maximalist stance to fend off government intrusion.
Because of its connections with legislators and regulators, Luria of D.A. Davidson stated that Microsoft is currently “the least scrutinized of the mega caps,” adding, “I think [Apple] should have called Microsoft before going in their current direction.”
“It’s usually a better policy to work with regulators than to challenge them.”
