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Justice Department files antitrust suit against Apple

The US Justice Department filed an antitrust lawsuit against Apple (AAPL), alleging that the maker of the iPhone illegally maintains its dominance over the smartphone market by boxing out competing apps and devices.

Apple "has maintained its power not because of its superiority, but because of its unlawful exclusionary behavior," Attorney General Merrick Garland said at a press conference Thursday.

Apple said it would fight the lawsuit, which it said "threatens who we are and the principles that set Apple products apart in fiercely competitive markets. If successful, it would hinder our ability to create the kind of technology people expect from Apple."

A victory for the US in this case "would also set a dangerous precedent, empowering government to take a heavy hand in designing people’s technology," Apple added in its statement.

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Apple's stock fell more than 4% following news of the lawsuit, which the Justice Department filed with 16 state attorneys general.

The filing sets up yet another confrontation between the US government and a Silicon Valley icon as the Biden administration tries to rein in Big Tech's power.

The Department of Justice is suing Google (GOOG, GOOGL) over antitrust allegations, while the Federal Trade Commission is suing Amazon (AMZN) and Facebook (META) alleging they also violate antitrust laws.

Apple CEO Tim Cook gestures at Apple's annual Worldwide Developers Conference at the company's headquarters in Cupertino, California, U.S. June 5, 2023. REUTERS/Loren Elliott
Apple CEO Tim Cook. (REUTERS / Reuters)

The new DOJ lawsuit filed Thursday poses a major new threat to Apple's various revenue streams.

Apple generates the bulk of its cash through the sale of its wildly popular iPhone, which accounted for $200.6 billion of the company's $383.3 billion in total revenue in 2023. But Apple's services and hardware that tie into the iPhone are also incredibly lucrative.

The company's wearables, home, and accessories business, which includes its Apple Watch and AirPods sales, generated $39.8 billion last year, while its growing services business, which includes subscriptions for things like Apple Music+ and App Store sales, brought in $85.2 billion.

The DOJ's suit comes just weeks after the European Commission (EC) fined Apple $2 billion for allegedly breaking competition laws in the bloc. The EC alleged the company illegally wielded its dominance to the detriment of its rivals in the market for the distribution of music streaming apps.

The Justice Department suit is just the latest headache for Apple, which is off to a rough start in 2024.

Shares of Apple are down 7% year to date as the company struggles with slowing iPhone sales in China, its third-largest market. Apple also lost its title as the world's most valuable company to rival Microsoft (MSFT).

How Apple allegedly wields power

At the center of the DOJ’s lawsuit is the iPhone, Apple’s most recognizable product.

The company harms consumers by making it more difficult for iPhone users to switch to a competing product and to access competing services, according to the government. The complaint also says Apple harms app developers by imposing restrictions on app creation and distribution.

That includes everything from text messaging to digital wallets to apps that reduce user dependence on the iPhone.

Garland, for example, characterized Apple’s iMessage as anti-competitive, saying that when it is used to text with a Google Android device, the iPhone user’s response is in green rather than blue.

That, he said, "limits functionality." The videos sent via text, Garland added, can also be pixelated and grainy.

Attorney General Merrick Garland speaks during a news conference at Department of Justice headquarters in Washington, Thursday, March 21, 2024. The Justice Department on Thursday announced a sweeping antitrust lawsuit against Apple, accusing the tech giant of engineering an illegal monopoly in smartphones that boxes out competitors and stifles innovation. (AP Photo/Jose Luis Magana)
Attorney General Merrick Garland speaks during a news conference after the Justice Department announced a sweeping antitrust lawsuit against Apple. (ASSOCIATED PRESS)

He then quoted Apple’s CEO responding to a complaint from a user who said he couldn’t send his mom certain videos: "'Buy your mom an iPhone.'"

Apple, the suit alleges, also makes it more difficult for smartphone users to access competing digital wallets by blocking developers from using tap-to-pay functionality in their apps. And it prevents the Apple Watch from working with Android smartphones while making it more difficult for someone with an iPhone to use a rival’s smartwatch.

"Apple repeatedly responded to competitive threats," said Assistant Attorney General Jonathan Kanter, "by making it harder to leave, then making it more attractive to stay. The antitrust laws have something to say about that."

Assistant Attorney General Jonathan Kanter, of the Antitrust Division, speaks during a news conference at Department of Justice headquarters in Washington, Thursday, March 21, 2024. The Justice Department on Thursday announced a sweeping antitrust lawsuit against Apple, accusing the tech giant of engineering an illegal monopoly in smartphones that boxes out competitors and stifles innovation. (AP Photo/Jose Luis Magana)
Assistant Attorney General Jonathan Kanter speaks during a news conference after the Justice Department announced a sweeping antitrust lawsuit against Apple. (ASSOCIATED PRESS)

Apple, according to the suit, also suppresses cloud streaming gaming apps and denies consumers access to so-called super apps, which allow users access to a broad range of functionalities from a single interface.

The wide-ranging suit is "about the core unfair practices of Apple," Case Western Reserve University antitrust expert and law professor Anat Alon-Beck said.

"Apple systematically excludes rivals from the Apple ecosystem. By doing that, Apple is hurting so many startup businesses, stakeholders, customers, and, in my opinion, its shareholders."

As a result, she predicts that Apple's stock will "see more downward movement."

Apple's Epic battle

This is just the latest antitrust battle Apple has had to contend with in the US.

The last was in 2020, when "Fortnite" maker Epic Games sued the company and accused it of violating antitrust law by prohibiting third-party app developers from offering their own payment methods within their apps —as opposed to using Apple's payment service.

Justice Department lawyers were permitted to present arguments in that high-stakes dispute. It focused attention on Apple’s App Store — the only place consumers can download apps for iPhones and iPads, which generally charges app developers a 30% commission on paid app purchases made through the platform.

Apple scored a victory in that case when the appeals court upheld a California trial court's ruling that said Apple did not hold a monopoly in the market for mobile app stores.

However, in a minor win for Epic, the appeals court also upheld the trial court's ruling that said Apple must allow app developers to offer more ways for users to pay for purchases.

OAKLAND, CA - MAY 20: Epic Games CEO Tim Sweeney arrives at the United States District Court on May 20, 2021 in Oakland, California. Epic Games, the maker of popular video game Fortnite, is accusing Apple of antitrust behavior through Apples business practice of restricting in-app payments outside of options offered through its own App Store. (Photo by Philip Pacheco/Getty Images)
Epic Games CEO Tim Sweeney. His company accused Apple of antitrust behavior by restricting in-app payments outside of options offered through its own App Store. (Philip Pacheco via Getty Images)

Both companies tried to take their fight to the Supreme Court, though the high court declined to take up either appeal.

Following that decision, Apple said it will allow developers to offer third-party payment options through their apps. However, the company said developers would still have to pay fees of either 12% or 27%, a move Epic CEO Tim Sweeney called "anticompetitive."

Apple is in the midst of reconfiguring its App Store payment system in the European Union. Under the EU's new Digital Markets Act (DMA), the company must allow EU customers the option to download third-party app stores and get access to third-party payment options.

Apple said it would address the measure and allow third-party downloads and payments, but will still charge developers a fee of 50 euro cents for each download if they cross the 1 million download threshold in a year.

Both Epic and Spotify objected to the measure, with Spotify CEO Daniel Ek calling the new rule "hostile."

Correction: A previous version of this article misspelled the names of Anat Alon-Beck and Jonathan Kanter. We regret the errors.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

Got a tip? Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.

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