Apple vs. the world: Can the tech giant survive a global regulatory onslaught?

By Chris MatthewsJon Swartz

Apple has a strong track record fighting antitrust enforcers, but the global scope of its current fight is something new

The U.S. Justice Department pulled out all the stops when it unveiled its antitrust case against Apple five weeks ago, staging a flashy press conference headlined by Attorney General Merrick Garland and explicitly comparing the case to the landmark Microsoft battle 30 years ago, which nearly led to a forced breakup of the company.

Investors greeted the news with a shrug, with Apple Inc. (AAPL) shares gaining 1% since the DOJ press conference, compared to a 3.8% decline for the broader S&P 500 index SPX, according to FactSet. The "Magnificent Seven" stock is about 7% below its December record close, but still retains a lofty 30.9 price-to-earnings ratio that suggests investors believe the future is bright.

Thursday's earnings report set the stage for another Apple rally, with shares rising 6% in after-hours trading.

Read more: Apple has withstood regulatory blowback before. The DOJ's latest suit may be different.

But those who have downplayed the DOJ's suit in the U.S. may be missing the forest for the trees, in that Apple is fighting a nearly unprecedented number of antitrust efforts in jurisdictions around the world, from Europe to Japan, and that its maximalist approach to fighting regulators could weaken the company's focus and drain its resources while ultimately forcing the company to make changes to its business model that will compress margins.

"The scope of regulatory action against Apple is global, and one of the important things to note is that different regulators are going after different parts of Apple's business," Gil Luria, software analyst at D.A. Davidson, told MarketWatch.

Apple declined to comment.

The European Union's Digital Markets Act, which went into effect in 2023, regulates so-called digital gatekeepers like search engines, app stores and messaging services. Under the law, Apple has been designated as a gatekeeper, which means that it must allow competing app stores to operate on Apple products like iPhones and allow app developers to directly accept payments from iPhone users.

Read more: EU's record Apple antitrust fine is just the start of a Big Tech regulatory crackdown this year

The designation came quickly on the heels of an EU antitrust ruling that led to the company being fined nearly $2 billion for dampening competition in the music-streaming app market, in violation of antitrust laws.

That poses a threat to Apple's services revenue, its second-largest revenue source after the iPhone and its fastest-growing sales segment, Luria said.

The Justice Department's case takes aim at Apple's most important source of revenue, the iPhone. The government alleges that Apple has illegally put up barriers to customers switching to cheaper or otherwise more appealing smartphones by prohibiting so-called super apps that provide multiple services within one application, blocking cloud-streaming game apps, degrading quality of third-party messaging apps and prohibiting cross-platform payment apps that would make it easier to switch from an iPhone to an alternative device.

Europe - with established tech laws, steep fines and an abridged appeals process - poses a far bigger challenge for Apple than the Justice Department, according to legal experts.

"Europe has an abusive dominant position in determining if a company harms competition, and it is not hesitant to levy huge fines," said former Federal Trade Commission General Counsel Alden Abbott, who is now senior research fellow at George Mason University's Mercatus Center. "If you drag it on with the EU, fines will accumulate into billions of dollars."

But U.S. monopoly law will make it exceedingly hard for the DOJ to persevere, Abbott said.

"Justice is going to push the Microsoft argument in that it was degrading the ability of third parties and IE, and try and analogize that with Apple Watch and messaging," he said. "Apple will say it allows greater access to its software. And Apple will say these arguments are dated."

Abbott pegs Apple's chances of winning what he expects to be a years-long antitrust showdown at 60%.

"It's an uphill battle for DOJ," Rebecca Haw Allensworth, an antitrust expert at Vanderbilt University, said in an interview. "Apple has the government's antitrust opinion and public opinion. Apple the company, fans and a broad segment of the market believes Apple is right, based on superior products. The only possible thing Apple is doing wrong is with developers. If based on public opinion, Apple is in good shape."

An Apple win in court would be another in a long line of victories on antitrust issues in recent decades, from accusations that it monopolized the digital music-download industry to the more recent battle with Epic Games over its app-store policies.

The DOJ case may have far-reaching implications, however, even if Apple wins in court, including signaling to U.S. allies that going after American tech giants for antitrust violations is fair game.

Last week, Japan's cabinet advanced new legislation that will mimic the EU's DMA regulations for smartphone operating systems, enabling the Japanese Fair Trade Commission to fine Apple upwards of 20% of its Japanese revenue for failing to allow rival app stores to operate on its phones.

Apple is reportedly lobbying Japanese lawmakers against the legislation, which the ruling Liberal Democratic Party aims to pass in the current legislative session ending in June. The LDP moved forward with the bill only after the DOJ unveiled its case and Prime Minister Fumio Kishida met with President Joe Biden on April 10.

On top of those battles, Apple is also fighting potential fines for antitrust violations in the Netherlands and South Korea, and faces an antitrust probe in Brazil, while Australia and Britain are considering introducing legislation on the European model that could hurt Apple's services margins in those markets as well.

Apple's response has been to push back against any and all attempts by governments to change features of its operating system, a time-intensive strategy that may distract company leadership from other goals, like innovation.

"Apple has held fast against antitrust challengers thus far, but it's possible the continued complaints about its policies and conduct, legal challenges in the U.S. and abroad, and now a major DOJ lawsuit will take their toll on the company sooner rather than later," wrote Bloomberg Intelligence analysts Jennifer Rie and Anurag Rana in a recent research note.

"Defending against the suits will require resources and time, create distractions from the day-to-day operations of the business and potentially damage Apple's competitive edge," they added.

Even if the company prevails in the DOJ suit, it's possible that Congress could force changes on the company anyway, especially if Apple's warnings about the effects of EU regulations don't come to fruition.

Both the DOJ and Apple have invoked the example of the Microsoft (MSFT) antitrust case, but Apple may want to learn from what Microsoft did after settling the case in 2002 - increasing its presence in Washington and working with policymakers to craft regulation rather than taking a maximalist approach to fighting off government intervention.

"I think [Apple] should have called Microsoft before going in their current direction," said Luria of D.A. Davidson, who noted that Microsoft is "the least scrutinized of the mega caps right now" in part because of its working relationship with lawmakers and regulators.

"Cooperating with regulators is often the better policy than challenging them."

-Chris Matthews -Jon Swartz

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05-03-24 0701ET

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