DoJ Partners With State AGs On Sweeping Apple Antitrust Probe

Update (0945ET): And just like that, Nasdaq goes green and Apple bounces from its pre-open lows.

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One day after Apple's latest developers conference left millions disappointed and added to the headaches of CEO Tim Cook, Politico reported Tuesday that the DoJ in partnership with several states attorneys general are bringing an anti-trust probe against the consumer tech giant over alleged abuses of its app store - mirroring complaints brought by the European Commission's anti-trust regulator.

The news sent Apple shares moving even lower in pre-market trade.

Of course, this is hardly the only bad news facing the Cupertino-based behemoth. The company's shares took a hit the other day when it decided to close stores in some of the worst-hit US states, sparking fears of a second wave. Plus, news that the European Union's anti-trust regulator was targeting the company over its app store and its apple pay service - two cornerstones of Apple's plan to rely on long-term revenue growth from its services business as long-term sales of handsets are expected to plateau, even as some analysts claim the company could benefit from a massive wave of upgrades as 5G is rolled out in the next generation of phones.

As Politico explains, the notion that Apple's app store incorporates several blatantly anti-competitive practices, like an arbitrary "Apple Tax" faced by some developers as an added cost of selling their product via the Apple Store (nevermind that they don't have a choice), isn't remotely controversial. Even former executives admit that the company unfairly disadvantages outside developers.

"In-app purchase is broken,” said Phillip Shoemaker, a former Apple executive who helped design and run the App Store from 2009 to 2016. "As Apple is entering into more and more of these areas and putting out of business more developers, they really have got to think differently."

As Politico explains, while Apple's iOS isn't nearly as dominant globally, within the US, it controls nearly half the overall smartphone market share, and the company uses this position to abuse its competitors in a way that has rankled developers for years. Apple's control over the App store could potentially doom the company's competitors.

While Apple’s iOS smartphone operating system has historically been less dominant than Google’s Android, the trend is shifting. In September, Apple’s iOS accounted for about 47 percent of smartphones in the U.S., compared with 51 percent for Android, according to comScore. When tablets are included, Apple's share jumps to 58 percent. For an antitrust suit, that growing dominance may be a key factor, said Gene Kimmelman, who worked in the DOJ's Antitrust Division during the Obama administration.

“It’s one thing to structure your services in a restrictive way or use exclusive contracts when you’re small,” said Kimmelman, now a senior adviser at Public Knowledge. “But the bigger you become, the more dominant you become in a market, the more likely those types of restrictions — unless they are absolutely essential to benefit consumers — will be viewed skeptically as harmful to competition."

Developers say Apple unfairly ties access to its App Store — the only way for them to reach customers who use iPhones and iPads — with its in-app payment system, which takes a 30 percent cut of most transactions. But the company has varying policies on which apps it requires to pay that 30 percent, which developers derogatorily call the “Apple tax."

Companies that offer what the company considers physical goods and services — including e-commerce platforms like Amazon, delivery apps like GrubHub or Uber, and booking services like AirBnB — are exempt. Apple also absolves what it calls “reader apps” from using its in-app payments. That category includes apps for things like magazines, newspapers, music, video, VoIP providers and cloud storage.
Apple maintains that all other digital goods and services, including ones that compete with its own offerings, must use in-app purchase. The company also prohibits developers from telling customers they might pay less if they signed up directly.

Some companies like Amazon get around Apple’s restrictions by declining to sell digital goods like e-books through the app, and instead requires customers log onto the website on a desktop or mobile device for purchases. Other subscription-based services such as Spotify, Pandora or Netflix used to allow app sign-ups but only at a higher price that passed the 30 percent fee on to the customer. (Netflix and Spotify have since changed their policies and no longer allow new users to sign up via Apple’s apps.)

Of course, the DoJ and FTC have already announced investigations into all the big tech behemoths - FB, Amazon etc. - but according to Politico investigators are subpoenaing documents and taking other steps suggesting the investigation is ramping up.

Spotify has long been among the most vocal in opposing Apple’s App Store policies. The company was the first to file an official complaint with Europe’s primary competition authority, the European Commission, in March 2019.