Apple’s App Store case and antitrust
Suddenly antitrust enforcement is back in fashion. Over the past few months the news media have been full of stories about both Congress and the executive branch launching antitrust investigations into big tech.
Even the third branch has gotten involved, with the Supreme Court’s surprise ruling in May against Apple. The case involved the market for smartphone apps, which Apple controls through its App Store. “By contract and through technological limitations,” Justice Brett Kavanaugh wrote for the court’s majority, “the App Store is the only place where iPhone owners may
lawfully buy apps.”
The market for apps is huge, with an estimated 1.2 billion iPhones sold worldwide.
By and large, Apple doesn’t develop the apps sold in its store. Independent developers create the product, then pay Apple $99 a year for the privilege of selling them. They also give Apple 30% of their gross revenue, a provision Apple enforces by handling the sales. The phrase “monopoly profits” was invented to describe markets like the one for iPhone apps.
Imagine buying a radio that allowed you to tune in only to stations that paid kickbacks to the manufacturer. Somehow, Apple has convinced us that’s a normal state of affairs with smartphones.
In 2011, a group of iPhone users sued Apple, alleging its monopoly violated the antitrust laws. The lead plaintiff is Robert Pepper, giving us a memorable case name: Apple v. Pepper. After eight years, the case reached the Supreme Court.
The question that tied up our federal courts for eight solid years was whether the iPhone users had the right to sue at all. Their claims were straightforward: Apple prevented any competition in the lucrative market for iPhone apps, which meets every conceivable definition of “monopoly” and “restraint of trade.” But the Supreme Court split 5-4 on the issue whether those facts supported a claim under laws intended to prevent monopolies and restraints of trade.
The point of dispute was whether iPhone users are “direct purchasers” under a 1977 Supreme Court case involving the brick trade. On a 5-4 vote, the court concluded they were, sending the case back for trial. But curiously enough, America’s antitrust statutes don’t actually impose a “direct purchaser” requirement.
The antitrust statutes (there are four major ones) are written at a high level of generality, much like laws against fraud, and for the same reason: If they outlawed only specific business practices, it would be easy to evade their reach with little changes here and there. But because the statutes are
written in such sweeping terms, the courts have a free hand to add various conditions and limitations, such as the “direct purchaser” requirement, based on whatever economic theory happens to be in vogue at any given time.
During the Progressive Era (1890-1916), our harrumphing judges strongly disapproved of all this newfangled regulation of the economy, even as a few almighty trusts eliminated meaningful competition from entire sectors of the national economy. Federal judges were so grudging in their application of the Sherman Act, the original antitrust statute, that Congress had to pass basically the same statute a second time, this time calling it the Clayton Act. Both acts remain in overlapping force today.
But fashions in antitrust change. During the post-World War II boom years, judges became enthusiastic about enforcing antitrust laws. Rather too enthusiastic, many would say, becoming an impediment to efficient markets. Their exuberance produced a sharp reaction in the 1980s with the rise of the Law and Economics school. Economists are fabulous at generating theories based on simplified models of the economy, rather in the style of a meteorologist beginning a long-term forecast with, “Assuming a stable jet stream and no ocean warming or cooling …” Lawyers, in turn, are good at turning gossamer theories into iron-clad rules. Put these tendencies together and you get Law and Economics. As applied to antitrust law, that meant minimal enforcement, with results apparent everywhere you turn in American society today.
University of Michigan business professor Gerald F. Davis documents what he calls “the vanishing American corporation.” There are fewer public corporations in the United States today than in 1980, although there are 100 million more Americans now. Once again, economic power is heavily concentrated. Inequality is growing. Those trends just might be related.
But in antitrust as with highwaisted jeans, everything old becomes new again. Perhaps all the current noise will translate into effective enforcement action, opening now-closed markets. Separating Facebook from Instagram, returning them to their natural state of competition, seems like an obvious move. In the meantime, a nice place to start is the market for iPhone apps.