It's not often that Apple (AAPL -0.35%) sheds $100 billion of market value, but that's what happened on March 21.
The Department of Justice and 16 state attorneys general sued Apple for monopolizing the smartphone market, adding to a long list of headaches for the iPhone maker, which is already struggling with headwinds in China and flat revenue growth. Apple also lost the title of the world's most valuable company earlier this year to Microsoft.
The DOJ alleged that Apple has an illegal monopoly in smartphones in violation of the Sherman Antitrust Act. Its complaints were far-reaching, arguing that Apple makes it harder for Americans to switch smartphones; undermines innovation in apps, products, and services; and imposes unjustified costs on developers, businesses, and consumers.
The general argument against Apple should be familiar to investors who have followed big tech companies like Apple, Alphabet, and Amazon. These companies wield tremendous market power and the line can often be blurred between what's simply acting in their own best interest and what's illegally harming customers and a competitive marketplace.
Let's take a closer look at the DOJ's lawsuit and the implications for Apple.
Image source: Getty Images.
What the government claims
Nearly all of Apple's revenue centers around the iPhone, including its services business and sales of products like Airpods and Apple Watches that are designed to work in tandem with the iPhone. The DOJ argues that Apple has extracted higher prices from consumers and imposed higher fees on developers and creators through a variety of anti-competitive tactics.
Those include:
- Blocking innovative super apps. The DOJ says that Apple has blocked the growth of "super apps" like Tencent's WeChat or Alibaba's AliPay that range from payments to messaging to entertainment. According to the DOJ, Apple resists super apps because if those apps were able to offer subsidiary apps inside them, Apple would lose control of payments it now retains through the App Store.
- Suppressing cloud gaming platforms. The DOJ also says Apple suppresses cloud gaming services by making gaming platforms submit games individually, rather than include them all in one app. Apple recently reversed those restrictions, but the DOJ said that years of resisting cloud gaming means that none of those services are on the iPhone.
- Excluding cross-platform messaging apps. Apple limits functionality with messages from Android phones, according to the DOJ, and restricts video quality in order to push people to buy iPhones.
Finally, the DOJ claims that Apple has limited the functionality of non-Apple smartwatches, helping to lock Apple Watch buyers into the iPhone and vice versa, and it limits third-party payment capabilities. For instance, it allows the tap-to-pay feature to be used with Apple Pay, privileging its own product over competitors like PayPal.
What's at stake for Apple
The DOJ isn't suing Apple for a specific amount. In the civil complaint, it says it is "seeking equitable relief on behalf of the American public to redress Apple's long-running, pervasive anticompetitive conduct."
Thus far, regulators have mostly been ineffective in reining in the market power of big tech companies in spite of multibillion-dollar fines. Nearly all of the "Magnificent Seven" stocks have recently reached all-time highs, though many have faced regulatory pressure. Apple, for example, was fined $2 billion earlier this month by the E.U. for blocking music streaming competition, including preventing Spotify from informing users of payment options outside of the App Store, through which Apple collects a 30% commission. Apple plans to appeal the ruling.
Apple makes nearly $100 billion in net income a year so a fine is unlikely to deter the company or significantly impact the stock unless it's in the tens of billions of dollars.
What could be more impactful is if the DOJ forces Apple to significantly change its business practices. This could jeopardize at least some revenue from its high-margin services business, which benefits from the 30% commission Apple is able to charge in part from some of the practices the DOJ says are monopolistic.
A mortal blow to Apple's business seems unlikely, but investors should keep an eye on the case. Companies like Netflix, Spotify, and Fortnite-maker Epic Games have been accusing Apple of anti-competitive practices for years, and a ruling against Apple could be more meaningful for the entertainment apps that depend on the iPhone.
For now, the investigation isn't a reason to sell Apple stock, but it is the latest in a series of events that signal that Apple's best days could be behind it. With the stock still trading at a premium, Apple shares could head lower if it doesn't reassure investors that it's still on the right path.
