Apple (AAPL) has long avoided the government-led antitrust headaches currently plaguing Big Tech rivals like Amazon (AMZN), Google (GOOG, GOOGL), and Meta (META). Until now.
The Justice Department is reportedly in the final stages of deciding whether to launch a sweeping legal attack on Apple, which could worsen already accelerating headwinds for the world’s most valuable company, which is off to a rocky start to the new year.
US antitrust investigators are wrapping up a two-year investigation into Apple’s heavily guarded ecosystem, according to the New York Times. Investigators are investigating whether integration among the company’s product line, including iPhones, the App Store, Apple Watch, iMessage and AirTags, stifled competition.
“You don’t step up unless you find there’s something important there that you want to investigate,” Martin Edel, an assistant professor at Columbia University Law School, said of the reported investigation. He said the multi-year investigation tends to be a sign that the department has found something it wants to pursue.
Still, he cautioned that it was possible the Justice Department’s investigation would not uncover any wrongdoing by Apple.
Threatens the ‘walled garden’
Apple’s antitrust concerns come as the company faces three downgrades by Wall Street analysts amid fears that demand for iPhones in China will weaken and the country’s economy will continue to falter. On Friday, Microsoft overtook Apple as the world’s most valuable public company at the end of the trading day.
Apple is also preparing to launch its most ambitious product yet, the Vision Pro spatial computer. The AR/VR headset, which will be available on February 2, is Apple’s first new device category since it introduced the Apple Watch in 2015 and could serve as the company’s successor to the iPhone.
But the AR/VR market is still incredibly small compared to the smartphone space, and consumers are starting to tire of the devices after a few months of use.
A DOJ lawsuit aimed at dismantling Apple’s “walled garden” ecosystem would pose a major threat to the company’s various revenue streams. Apple generates the bulk of its cash from sales of its wildly popular iPhone, which will account for $200.6 billion of the company’s $383.3 billion in total revenue in 2023.
But Apple’s services and hardware that connect to the iPhone are also incredibly lucrative. The company’s wearables, home and accessories business, which includes sales of Apple Watch and AirPods, generated $39.8 billion in revenue last year, while its growing services business, which includes subscriptions such as Apple Music+ and App Store sales, generated $85.2 billion in revenue.
Edel said he expects the DOJ to take any antitrust action against Apple to look at how the company maintains a dominant position in a particular market in which it has an alleged monopoly, and not how it has established a significant market position.
Apple could be particularly vulnerable to a government-led antitrust fight in the final months of the Biden administration, which continues an aggressive push for dominance in Big Tech.
“The ministry has acted very aggressively against companies that it thinks are maintaining their monopoly positions through illegal means,” Edel said.
University of Miami School of Law professor John Newman told Yahoo Finance that no antitrust case is easy, and antitrust cases are among the most difficult, but the Justice Department brings many strengths to the table.
First, he said, prosecutors can access company documents and data before filing a complaint.
“If I were Apple, I would be pretty concerned about this,” Newman said, adding that the Justice Department has some of the best antitrust litigators in the world.
Critics say Apple abuses its position in the market in various ways, including charging app developers 15% to 30% of app store sales.
The company has also been accused of blocking rivals from using Apple services such as Find My and the tech giant’s payment technology.
Interoperability between Apple and third-party services is also a sticking point, as app developers and hardware manufacturers accuse Apple of deliberately cutting off access to certain features available to Apple devices and services.
epic effect
There are currently two separate antitrust lawsuits that could affect the Justice Department’s approach to the allegations against Apple.
One of them is a federal antitrust case heard by the Ninth Circuit Court of Appeals in October. Justice Department lawyers have been allowed to present arguments in the high-stakes dispute between popular app developer Epic Games and Apple.
In that case, the appeals court upheld the California court’s ruling that Apple did not have a monopoly on the market for mobile app stores.
But in a narrow win for Epic, the appeals court also upheld the administrative court’s ruling that said Apple must allow app developers under anti-steering laws to offer app users more ways to pay for purchases.
Apple and Epic are now appealing the decision to the Supreme Court, but the court has not yet said whether it will hear the case. Newman said the case’s impact on a Justice Department-led antitrust case will depend on where the department chooses to file the case.
“They could take the fight to Apple’s doorstep, but that would make the Epic case loom larger on top of a DOJ case,” Newman said. “The DOJ may want to stay out of the Ninth Circuit altogether and start with a clean slate.”
Google’s war
The second case that could affect the Justice Department’s approach to Apple is a pending antitrust lawsuit against Google for its dominance in the search engine market.
Closing arguments in the case are planned to be held in March. Apple is joining this conversation because by 2021 Google will have a total of $26 billion to serve as the default search engines for paid mobile phone manufacturers (including Apple).
The lion’s share of these payments went to Apple. Analysts at Bernstein say this figure would likely bring Apple annual revenue of between $18 billion and $20 billion. The $20 billion payments will represent 5.5% to 7% of Apple’s annual revenue over the last three years.
If the Justice Department’s investigation into Apple is in fact nearing its end, Edel said discussions between his attorneys and Apple are likely already underway.
Those talks and negotiations could potentially resolve the Justice Department’s antitrust concerns without the need for litigation, he said.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
Daniel Howley He is the technology editor of Yahoo Finance. He has been interested in the technology sector since 2011. You can follow him on Twitter. @DanielHowley.