The answer is both. How so? The recent antitrust complaint against Apple heralds a pivotal shift in understanding the influence of tech giants on innovation in the digital realm. This article highlights three key takeaways.
Also, read analysis on the Apple lawsuit from Herbert Hovenkamp, Randy Picker, and Fiona Scott Morton.
In our recent book How Big-Tech Barons Smash Innovation―and How to Strike Back (HarperCollins 2022), Ariel Ezrachi and I explore how a few Big Tech firms, in controlling significant ecosystems, distort the paths of innovation and undermine disruption. The Tech Barons promote innovations that support their ecosystems (and reinforce their power), but quash any innovation that threatens to disrupt their profit models.
So, what is notable about the recent antitrust complaint by the United States, 15 states, and the District of Columbia against Apple? From an innovation perspective, at least three things:
First is the shift in focus from narrowly defined markets to ecosystems.
In contrast to Epic’s largely unsuccessful antitrust litigation against Apple, the government complaint defines a broader market (performance smartphones, or alternatively all smartphones, sold in the United States). But in reading the complaint, one realizes that Apple’s power stems from its growing ecosystem of products and services. If some apps are worth millions of dollars, and some popular platforms are worth billions of dollars, then ecosystems can be worth over a trillion dollars (looking at the current market capitalization of Google, Apple, Meta, Amazon, and Microsoft). Their power doesn’t arise from one platform or market; it arises from their control of multiple, popular interlocking platforms, products, and services, which, in turn, attract many developers, sellers, and consumers. Thus, the ecosystem is more powerful than the sum of its parts—the platforms, services, the data collected, and the analytics undertaken. Why? One might avoid an app or even a platform, but not these Tech Barons’ expanding ecosystems.
Indeed, as the complaint alleges, Apple’s then-CEO Steve Jobs talked about locking customers into Apple’s ecosystem (and not any particular product market). Likewise, Google’s CEO told investors in 2019, how his company builds ecosystems, not products: “If you look at an ecosystem like Android, this is what we do. And so that’s going to be a focus for us.” So, if the Tech Barons focus on building ecosystems, why should antitrust agencies and courts view the competitive dynamics through narrowly defined markets? Antitrust’s market definition exercise primarily benefits the testifying economic experts, while leaving the courts befuddled. But the primary purpose in defining markets, as the Ninth Circuit noted in Epic, is to assess “the field in which meaningful competition is said to exist.” If the Tech Baron’s power arises from its control over the ecosystem (and not a particular platform, product, or service), and if the Tech Baron leverages this power to quash innovation that disrupts its power or profits, then one can miss a lot of these anticompetitive effects if one focuses only on narrowly defined markets. The Apple complaint avoids this mistake by focusing on Apple’s ecosystem, rather than narrowly defined markets. Indeed, notably absent from the complaint is the SSNIP test traditionally used to define narrow markets.
Second are the allegations of how Apple stifles innovations that can potentially disrupt its ecosystem.
As the complaint alleges, “Apple executives understand that third-party products and services can, in their own words, be ‘fundamentally disruptive’ to its smartphone monopoly, decreasing users’ dependence on Apple and the iPhone and increasing competitive pressure on Apple.”
As our book explores, innovation can be distinguished by type (disruptive or sustaining) and value (whether the innovation increases overall value/well-being, transfers value from one group to another, or destroys overall value). We call the true innovators (those with disruptive innovations that increase overall value) the Tech Pirates. The irony here is how Apple changed from being a Tech Pirate to a Pirate killer. You might recall Apple’s “1984” Superbowl ad, where the underlying message was how the company’s new Macintosh computer would disrupt IBM’s hegemony over personal computers. Indeed in his inspirational 1983 speech to Mac developers, Steve Jobs said, “It’s better to be a pirate than join the navy.” Fast forward to today, where Apple uses multiple weapons to kill the pirates and persuade app developers to join it’s navy. Basically, to enter the Apple ecosystem, the innovation must complement, not disrupt, Apple’s value chain. The complaint alleges, among other things, how:
· Apple stifles “new paradigms that threaten Apple’s smartphone dominance, including the cloud, which could make it easier for users to enjoy high-end functionality on a lower-priced smartphone—or make users device-agnostic altogether”;
· Apple uses its control of app distribution to exclude Tech Pirates (alleging how Apple “frequently uses App Store rules and restrictions to penalize and restrict developers that take advantage of technologies that threaten to disrupt, disintermediate, compete with, or erode Apple’s monopoly power”); and
· Apple denies or restricts access to key points of connection between apps and the iPhone’s operating system (called Application Programming Interfaces or “APIs”) to kill off these Tech Pirates.
Who pays the price? We do, as we cannot opt for potentially better, less expensive innovations, including super apps (where instead of having to return to Apple’s app store and navigate many separate apps, passwords, and set-up processes, we can rely on a single app that provides us with broad functionality), cloud streaming apps that reduce our dependence on Apple’s operating system and hardware, cross-platform messaging apps (where we can send our friends videos without their having to purchase an iPhone), cross-platform smartwatches (where iPhone users can respond to the messages on their Garmin watches), and cross-platform digital wallets (which offer tap-to-pay functionality without Apple’s 15 basis points (.15%) fee for every transaction).
The point here is that Apple did not simply favor its apps and services; instead, the complaint alleges that Apple degraded the “quality, privacy, and security for its users” by hindering these Tech Pirates’ disruptive innovations. As the European court held in the Google Shopping case, monopolies can improve their products. But monopolies can’t justify degrading their rivals’ offerings (such as Google demoting rival comparison shopping services on its search engine’s general results pages) as a “quality improvement” that constitutes “competition on the merits.”
Third, and most importantly, the harmful effects of killing off the Tech Pirates generally extend beyond narrow product markets and even the Tech Barons’ ecosystems.
As the complaint alleges, “Apple influences the direction of innovation both on and off the iPhone.” So, even if you don’t own an iPhone, you are likely harmed. More broadly, we have seen how some of the toxic innovations from the Tech Barons’ ecosystems harm our children, corrode our social and political fabric, impair our autonomy and well-being, and damage our democracy.
Consequently, three cheers for the Department of Justice and bi-partisan coalition of states seeking to save the Tech Pirates and promote disruptive innovations that actually serve our needs, rather than the Tech Barons’.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
