Inside the DOJ’s antitrust complaint against Apple.

Dave Bittner: Hello everyone and welcome to "Caveat N2K" Cyberwire's privacy, surveillance, law, and policy podcast. I'm Dave Bittner and joining me is my co-host Ben Yelin from the University of Maryland Center for Health and Homeland Security. Hey, Ben.

Ben Yelin: Hello, Dave.

Dave Bittner: On today's show, Ben and I dig into the recently announced antitrust case the US Department of Justice has launched against Apple. While this show covers legal topics and Ben is a lawyer, the views expressed do not constitute legal advice. For official legal advice on any of the topics we cover, please contact your attorney. [ Music ] All right, Ben, this is one of those stories that you and I often behind the scenes refer to it as we light up "the bat signal," right?

Ben Yelin: It's a bat signal story for sure.

Dave Bittner: Right. It's, like, this is one that demands our immediate attention with its timeliness and its importance here, so.

Ben Yelin: We will not let our listeners down.

Dave Bittner: There you go. Why don't you start off with sort of a broad description here. What exactly is the action that the DOJ is taking here against Apple?

Ben Yelin: So, the Department of Justice, along with 15 state attorneys general and the Attorney General of the District of Columbia, has sued Apple for alleged federal and state antitrust violations. What we've seen so far is an 88 page complaint. I looked through it as closely as I could, prior to recording this. What we do not have yet is an official response from Apple. So, they issued kind of a press release responding to the general charges and the complaints, but over the next month or so they'll have an opportunity to file an answer with the court. Once we get an answer and we dispense with preliminary motions in this case, which could take months or years, we'll either get a settlement or we'll get a resolution on the merits. So, the first thing I should say is this is going to be a long term case.

Dave Bittner: Yeah.

Ben Yelin: It's going to be an extended litigation for a while.

Dave Bittner: Anybody who went through the Microsoft case back in the, I guess it was the '90s, right?

Ben Yelin: Yeah, late '90s. I mean, we're looking along those timelines.

Dave Bittner: Right.

Ben Yelin: And I feel like our legal system is even more clogged than it was then, so.

Dave Bittner: Oh, goody.

Ben Yelin: It could be significantly worse.

Dave Bittner: Okay.

Ben Yelin: So, what is the nature of the complaint? It goes back to a late 19th century law called the Sherman Act. And the Sherman Act reads that "Every person," and for the purposes of antitrust law, person also refers to corporation, "who shall monopolize or attempt to monopolize or combine and conspire with any other person or persons to monopolize any part of the trade or commerce among the several states or with foreign nations shall be deemed guilty of a felony." There are basically two elements to a charge under the Sherman Act. The first is that you actually have to have monopoly power in a relevant market. The big question there is what counts as a relevant market? So, the allegation here from the D -- from DOJ is basically it's the App Store market, both within the United States and globally. And then the second element is "Willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product." So, this is really the factor that I think trips people up. There has to be some kind of action taken on the part of the company that's being accused of monopolizing to secure that monopoly, other than just simply having a better product. What Apple is going to argue here is that the reason they have the 60, 70% market share is that they have a better product. It is more user friendly. They released the first smartphone before there was any Android smartphone device. If I'm not mistaken, the iPhone had had already been released and people have been loyal to this product because of how effective it is. The allegation is that Apple has taken various measures that are anticompetitive in nature. So, there are a bunch of those measures that they list. I'm going to start with my favorite one because I think this is just the best example of something that --

Dave Bittner: Okay.

Ben Yelin: -- everyone will understand. Can you guess what I'm going to talk about first?

Dave Bittner: Maybe messaging?

Ben Yelin: Green bubbles.

Dave Bittner: Green bubbles.

Ben Yelin: It's the green bubbles.

Dave Bittner: Okay.

Ben Yelin: So, Dave, have you ever been -- we are both iPhone users.

Dave Bittner: We are.

Ben Yelin: Have you ever been in a group messaging chat with a bunch of individuals and one person, we all know who they are, does not have an iPhone?

Dave Bittner: Yes. In my life, that one person is Joe Carrigan. My co-host...

Ben Yelin: Throw him under the bus, there. I'm not going to throw mine under the bus because that person happens to sign some of my...

Dave Bittner: Joe is proudly not an Apple user. In fact, Joe and anyone who listens to "Hacking Humans" will know that Joe refers to Apple users as the "Apple cult." So, that -- he --

Ben Yelin: Ouch.

Dave Bittner: -- he lays his bias bare, proudly.

Ben Yelin: I am a member of that cult, maybe not willingly, but I've certainly drunk some Kool-Aid over the years.

Dave Bittner: Yes, yes.

Ben Yelin: So, when you are communicating in that type of chat environment, when it's just you and other iPhone users, everything is seamless. You got the blue messages. You can use the messenger application on your Mac device or on your iPad, your tablet. The videos and pictures that you exchange are of the highest quality. The way that Apple has designed its software is that if there is a non-Apple user that is a part of that conversation, a lot of that functionality is lost, including the ability to send those super high resolution photos and videos and the inability to be seen on the Messenger App on a desktop or on an iPad.

Dave Bittner: You also lose a lot of your security because it's no longer end to end encrypted.

Ben Yelin: You no longer have end to end encryption, that's exactly right. So, Apple has kind of said, like we're in the process of fixing this. And you know, maybe they're just saying that under the threat of this litigation, they're already -- at least there are murmurs that they are making changes here. But I feel like that is the most concrete, easy to understand example of anti-competitive practices that Apple has taken. Making not -- just making life more difficult for non-Apple users.

Dave Bittner: Yeah, and to be clear here, I mean, I think the technical issue here is that Apple does not make the SMS functionality the, you know, your cellular provider messaging functionality, Apple does not make that available on their platform outside of Apple's own messaging app.

Ben Yelin: Right.

Dave Bittner: So, iMessage, the messaging app, that's the only thing on your phone, if you have an iPhone, that has access to that. And the DOJ is saying that that is restrictive by not allowing third party app makers to also have access to that, it takes away their ability to fall back to that technology. It makes it harder for them to have a seamless, you know, cross-platform communication kind of thing. And so, DOJ is saying that restriction is problematic here.

Ben Yelin: Yeah, and then there's some other anti-competitive practices that they allege. One of them that was interesting me -- interesting to me was the Apple Watch. So, I do not have an Apple Watch, but it is a beautiful accessory you can put on your wrist.

Dave Bittner: I'm looking at mine right now. It is quite nice.

Ben Yelin: And it integrates very nicely with your iPhone.

Dave Bittner: Which is the point, right?

Ben Yelin: Which is the, of course, the point.

Dave Bittner: Right, right.

Ben Yelin: So, if a phone call comes in, your watch buzzes, your iPhone buzzes, they're all integrated, you know, send and receive messages on both.

Dave Bittner: I consider my Apple Watch to be an iPhone accessory.

Ben Yelin: Oh, totally, yeah. I mean, that's I think perhaps the right way to interpret it. The allegation that the DOJ is making is that Apple has made it too hard for third party smartwatches to pair with iPhones so that they can receive those notifications.

Dave Bittner: Right, right. And that Apple -- things like Apple Watch get exclusive API's, exclusive conduits between the phone and the watch that third party watchmakers don't get.

Ben Yelin: Exactly.

Dave Bittner: They don't get access to that. Yeah.

Ben Yelin: Meaning that it's going to be a lot more difficult for those third party watch makers to compete in the market, where Apple has a 60, 70% market share.

Dave Bittner: Right.

Ben Yelin: So, I think there are two critical questions that have to be answered in this case. One is sort of the sphere of the monopoly. What specific market are we talking about here? Does it relate to applications? Does it relate to the use of smartphones writ large? That also relates to the threshold level. So, these estimates that I've been mentioning on market share are just estimates and there is no well settled case law about how high a threshold in terms of monopolization a company has to reach before it is in violation of the Sherman Act. So, the Sherman Act doesn't say you have to have an 80% market share.

Dave Bittner: Yeah.

Ben Yelin: I read you the only two elements that are basically at issue in the Sherman Act and none of them reached that threshold. So, a court is going to have to determine is this actually a monopoly when there is a pretty serious competitor here and there aren't really significant barriers to entry for new players on the market.

Dave Bittner: There's an interesting little thing that DOJ did where they sort of invented this category that they call performance mobile devices, performance phones and by having -- by putting Apple in the performance category, they say that Apple has a 70% market share of that rather than the 65% market share of all phones, right?

Ben Yelin: That was interesting to me, too. I don't know how they can do that. I mean...

Dave Bittner: Yeah. Let me ask you this.

Ben Yelin: Yeah.

Dave Bittner: So, one thing that was -- has been interesting to me as I've been reading through these articles and trying to get up to speed on it myself is from a high level, this point of view that something that is a legitimate business practice becomes problematic when your company reaches monopoly size and influence.

Ben Yelin: Yes. So, you know, if you think about functionality, I'm trying to picture just like a wide open industry. So, let's think about, I don't know, hotels and reward systems, right? There are a lot of different hotels. Obviously, there's been some agglomeration and now you have super companies that have similar rewards programs, but the market is big enough in those circumstances that it's easy to enter and exit the market. The consumer has a lot of choices. So, anti-competitive practices that we might allege as part of this DOJ complaint when applied to that kind of scenario wouldn't be such a big deal. "Oh, you can only get rewards points if you stay at, you know, X, these particular hotels at this particular time, we don't accept rewards points from other hotel chains." Obviously not a problem in a market that has a lot of different players. That's just -- that's good business acumen, right?

Dave Bittner: Right.

Ben Yelin: Building customer loyalty.

Dave Bittner: Yeah.

Ben Yelin: But yeah, when you get into the situation where one company is on the precipice of monopoly power, those types of anti-competitive actions are going to be put under the microscope because they've reached that threshold in the market. So, again, we just have to determine whether they have actually reached that threshold and in what market. And then that's I think going to be the first major issue to resolve here before we get to are these actually the type of anti-competitive practices that would qualify under the statute?

Dave Bittner: All right, we're going to continue this conversation after we take a quick break. Stay with us. [ Music ] I want to share a quote I pulled here from Nick Heer, who is the author of a website called "Pixel Envy." It's kind of a tech punditry kind of thing, but one of the -- he does have some specialization on covering Apple things. And I'm going to quote him, he says, "What is the goal here? The government's position is not that Apple should reduce the capabilities of its own products, but that Apple should not so aggressively restrict third party capabilities. What if other smart watches or tracking devices or headphones worked better with iPhones? Maybe not entirely to Apple's first party standards, but, you know, better. That sounds like a more preferable solution than one in which consumers are compelled to remain within the confines of first party products, allegedly because of deliberate attempts to avoid competition." I think this is a really nuanced observation here of what I think is at play because I think a lot of folks, particularly Apple fans, are coming at this from the point of, "Well, I like my Apple devices."

Ben Yelin: Cult members like us, yeah.

Dave Bittner: Right. I'm okay paying a premium. I'm okay with there only being, like, there only being one iMessage on my phone, well, that doesn't keep me from doing anything. There only being one wallet on my phone, doesn't keep me from doing anything because it's great. The government is saying, okay, but how do you know that there aren't that there are -- like, they may be great and that may be true...

Ben Yelin: But let the market figure that out.

Dave Bittner: Well, right, but Apple is maintaining their position by the -- I guess it's that those two things aren't mutually exclusive. Apple can still be making great things. If you're a user and you think this is great, super, but they're restricting any competition, which I guess you could make the argument could lead to Apple being lazy or, you know, letting things fall by the wayside and consumers not having any choice because they are so locked into the platform because they bought an Apple Watch, because they bought Apple headphones, because, you know, all these kinds of things and that is part of what is at play here. Do you agree that that there's something to this approach or this description that Nick Heer is making?

Ben Yelin: Yeah, I think that's very well said. I definitely think there's something to it. I think that's why the DOJ and the attorneys general here have initiated this action is that, you know, it's these -- they're welcome to take practices that improve their portion of the market share as long as they are not unduly restricting activity from third party app developers, for example. In a way that doesn't give consumers additional options because people are just so locked into these Apple products. So, yeah, I think that's very well said.

Dave Bittner: Another bit of sort of tech punditry that I wanted to get your take on. John Siracusa, who's well known in the Apple world as one of the co-hosts of a well-known Apple Tech Podcast was making the point that there are two ways to come at something like this. One is in terms of the government having a problem with the way Apple is doing things, one of them is this way, which is the DOJ suing them. The other way would be through legislation.

Ben Yelin: This was a great point.

Dave Bittner: And he making the case that legislation is the better way than a lawsuit.

Ben Yelin: Yeah and the EU has passed legislation kind of along these lines to restrict these anti-competitive practices.

Dave Bittner: Right.

Ben Yelin: What's the problem we've brought up a million times on this podcast? Have you seen our Congress?

Dave Bittner: Right.

Ben Yelin: Have you seen the individuals that occupy seats in our Congress? We can barely pass a federal budget before the government shuts down. We have these deadlines, you know, to simply keep the lights on at government agencies every few months. It took the House a month to dispose of the -- depose of their speaker and elect a new speaker. So, this is a great example of where the complete dysfunction in our inability of our Congress to do anything of any consequence, unless their backs are against the wall and we're facing government shutdown or a potential default, this is where it really comes back to bite us. I completely agree that this would be better decided in the policy realm among policy experts. I think judges, many judges would say that in a decision about this. They would say this is an issue best left to our legislate, our legislatures. Now state legislators, I think are decently well situated to come up with these requirements, but then you get into compliance issues having 50 separate state statutes, that sort of thing. So, yeah, this is the perfect example of where the vacuum resulting from federal inaction ends up hurting all of us, the entire industry, and I think is really, and I don't want to overstate it, but I think it's the proximate cause of this lawsuit.

Dave Bittner: Yeah, I think one of the things that Siracusa was trying to illustrate was that when you make a legislation, you can lay out exactly what you want.

Ben Yelin: Right.

Dave Bittner: You can be verbose. Whereas when you're going back 120, 130 years to the Sherman Antitrust Act, that's a blunt instrument.

Ben Yelin: Right. And you're confined to what's in the existing statute, which obviously was invented before automobiles, let alone the internet.

Dave Bittner: Yeah.

Ben Yelin: So, you are confined by that. You are confined to the specific issues that have been raised against one single company as opposed to addressing this as a public policy problem, which is the way it should be addressed.

Dave Bittner: And I think that, you know, the Sherman Antitrust Act goes towards monopolies. And I think most people would look at the situation we have and say, "Well, that's a duopoly."

Ben Yelin: Right.

Dave Bittner: And but the laws we have don't address that, so we're using a not entirely appropriate law to come after someone that doesn't exactly reflect the situation that we find ourselves in.

Ben Yelin: Yeah, and I think ultimately that might be where their case fails or at least what causes a settlement more along Apple's terms and on the DOJ's terms is the fact that to a layperson this is not a monopoly. There are -- there is another major player in this market and the other major player in this market, it should be noted, is much better at, you know, having good relationships with third party developers, having ways to download applications.

Dave Bittner: Right, right.

Ben Yelin: Outside of the App Store.

Dave Bittner: It's a much more open system.

Ben Yelin: It is a much more open system. So, I think what a court might say is consumers can decide whether they want that open system.

Dave Bittner: Yeah.

Ben Yelin: And if they have another option, they can take that other option.

Dave Bittner: Right.

Ben Yelin: Yeah.

Dave Bittner: Right. I think the DOJ -- part of the DOJ's point here is that if you find your way in the Apple ecosystem, Apple does everything in its power to make it harder for you to switch. But that's, I mean, that's in Apple's best interest, right?

Ben Yelin: I think so, yeah.

Dave Bittner: Where do you think this is going to go, Ben? Do you think -- do you -- let's just start high level. Do you think the DOJ has a case here?

Ben Yelin: Yes. I don't think, you know, Apple would succeed on a motion to dismiss. I think this is a well pleaded complaint, 88 pages worth of evidence that they have accumulated. So, yes, I do think there's a case. Whether that case will ultimately be successful, I think depends on the factors that we mentioned. For a variety of reasons, it might be in Apple's best interest to settle, and a settlement could take a bunch of different forms. They could pay some sort of monetary penalty.

Dave Bittner: Right. Go through their couch cushions.

Ben Yelin: Exactly, which is all it would be to Apple, right?

Dave Bittner: Right.

Ben Yelin: And then the other option is to come up with some negotiation with the DOJ and all these AG's from the various states to actions that they could take to curtail some of these anti-competitive practices. So, in other words, all of the conversations we have in our group chats, even with non-iPhone users, will be blue and full of beautiful, well pixelated pictures and videos.

Dave Bittner: Right, right.

Ben Yelin: So, that might be a result of some type of settlement. A settlement would come sooner than an actual case. I mean, with a case we're talking about years of discovery and dueling motions and blah, blah, blah blah, blah, you know? And then we're just -- this is just a complaint to the Federal District Court, so that could be appealed to the appeals court and.

Dave Bittner: Well, the company that is as famously private as Apple is, do you suppose that the notion of discovery of having, you know, executive e-mails put out there in public would have a serious influence on their desire to get this over with?

Ben Yelin: Totally. And that's why I think there's a good chance at settlement. You know, before we get to the embarrassing things beneath the bowels of Apple headquarters and Silicon Valley, let's just put a nip in this bud and settle. I don't really think settling, this is just my personal opinion, but would it really hurt Apple's bottom line that much if they were a little more accommodating to non-Apple users of third party applications?

Dave Bittner: Yeah.

Ben Yelin: Maybe a little bit.

Dave Bittner: Yeah.

Ben Yelin: I don't know. I don't know.

Dave Bittner: I just think it, I mean Apple's culture is very much that they know best and nobody's going to tell them, like, you know, so that's where I think there's going to be an emotional sticking point with many of the powers that be at Apple that they're going to, you know, maybe they just have to, you know, grit their teeth and bear it. But I guess my point is, don't underestimate the importance on the high levels of Apple of fighting this for the principles of it, right?

Ben Yelin: Yeah.

Dave Bittner: Yeah.

Ben Yelin: And that we've seen them do that before.

Dave Bittner: Yeah.

Ben Yelin: One of the most high profile example was Apple V. FBI in 2015.

Dave Bittner: Right.

Ben Yelin: And it would have been easier for them to just sweep it under the rug, give the FBI the access of their requesting, but they sit on principle.

Dave Bittner: Yeah.

Ben Yelin: And they didn't win in that scenario. The FBI was able to obtain the information using other means, but I think it helped Apple's reputation as we have principles that we're going to fight for.

Dave Bittner: All right, well, more to come for sure, several years more, I suspect. Who knows?

Ben Yelin: This is going to, like, extend the life of our podcast it's going to go on so long.

Dave Bittner: Who knows? No, it's fascinating, lots of opinions, lots of hot takes, but I am glad to have you to bounce all of this off of. [ Music ] That is our show. We want to thank all of you for listening. A quick reminder that N2K strategic workforce intelligence optimizes the value of your biggest investment, your people. We make you smarter about your team while making your team smarter. Learn more at n2k.com. Our executive producer is Jennifer Eiben. This show is mixed by Tre Hester. Our executive editor is Peter Kilpe. I'm Dave Bittner.

Ben Yelin: And I'm Ben Yelin.

Dave Bittner: Thanks for listening. [ Music ]