On March 21, a seismic shift rattled Apple‘s (NASDAQ: AAPL) financial landscape, shedding a staggering $100 billion in market value. The Department of Justice, alongside 16 state attorneys general, launched a lawsuit against Apple for allegedly monopolizing the smartphone realm. This legal entanglement adds to a compendium of challenges the iPhone giant is currently navigating. From grappling with challenges in China to confronting stagnant revenue growth, Apple is confronting a tempestuous sea. The recent dethroning from its pedestal as the world’s most valuable company by Microsoft further compounds Apple’s quandary.

The Department of Justice intensified the spotlight on Apple, asserting antitrust violations under the Sherman Antitrust Act. The allegations depict a grim portrayal of Apple’s practices, claiming the tech behemoth has fostered an unlawful monopoly that hampers consumer switching ability, stifles app, product, and service innovation, and imposes undue financial burdens on developers, enterprises, and the public.

Investors well-versed in the landscape of tech titans like Apple, Alphabet, and Amazon may recognize a recurring narrative. These industry stalwarts command immense market authority, blurring the demarcation between self-interest pursuit and anticompetitive maneuvers that potentially undermine market vitality.

An exploration of the DOJ’s lawsuit and its repercussions on Apple is warranted.

Image source: Getty Images.

Allegations Against Apple Unpacked

Apple’s fiscal foundation predominantly hinges on the iPhone, encompassing its services sector and sales of complementary products such as Airpods and Apple Watches that are intricately linked to the iPhone ecosystem. The DOJ contends that Apple has coerced consumers into higher price brackets and imposed elevated fees on developers and content creators through an array of anti-competitive stratagems.

The litany of grievances include:

• Thwarting innovative “super apps.” The DOJ fingers Apple for impeding the proliferation of “super apps” like Tencent‘s WeChat or Alibaba‘s AliPay, spanning payments, messaging, and entertainment. The DOJ posits that Apple refrains from endorsing super apps since their integration of subsidiary apps would jeopardize Apple’s current dominion over payments channeled through the App Store.
• Stifling cloud gaming platforms. Apple’s practices are accused of suppressing cloud gaming services by mandating that gaming platforms submit games individually, rather than aggregating them within a single app. While Apple recently relaxed these constraints, the DOJ contends that years of resistance have barred such services from iPhones.
• Excluding cross-platform messaging apps. The DOJ asserts that Apple curtails the functionalities of messages originating from Android devices and constrains video quality to incentivize iPhone purchases.

Lastly, the DOJ alleges that Apple has constrained the efficacy of non-Apple smartwatches to cement the interdependency between Apple Watch purchasers and iPhone owners. It further restricts third-party payment capabilities, favoring its proprietary tap-to-pay feature through Apple Pay over competitors like PayPal.

Implications for Apple

The DOJ refrains from specifying a monetary demand in its lawsuit. In the civil complaint, the DOJ expresses its intent to secure “equitable relief on behalf of the American public to rectify Apple’s systemic, enduring anticompetitive practices.”

Historically, regulatory endeavors aimed at curbing the omnipotence of big tech entities have struggled despite levying multibillion-dollar fines. The stocks of most “Magnificent Seven” corporations have recently reached unprecedented zeniths even amid regulatory scrutiny. For instance, Apple faced a $2 billion fine from the E.U. not long ago for stifling music streaming competition, including curtailing Spotify‘s ability to inform users about payment alternatives beyond the App Store, from which Apple siphons a 30% levy. Apple intends to contest the ruling.

Apple’s annual net income standing at almost $100 billion renders it impervious to fines unless they soar into the tens of billions. The semblance of a profound alteration in Apple’s modus operandi, mandated by the DOJ, could potentially imperil some revenue from its lucrative services segment, buoyed by the 30% commission Apple imposes — a practice that the DOJ deems monopolistic. While a cataclysmic fallout for Apple appears unlikely, investors must keenly monitor how this legal saga unfolds.

Firms like Netflix, Spotify, and the creator of Fortnite, Epic Games, have continuously accused Apple of anti-competitive practices. A ruling adverse to Apple could significantly impact entertainment apps reliant on the iPhone ecosystem.

The ongoing investigation should not serve as an alarm bell for Apple shareholders yet. Nonetheless, it constitutes the latest entry in the annals signaling potential turbulent times ahead for Apple. Trading at a premium, Apple’s stock may face downward trajectories if the company fails to assuage investor anxieties about its trajectory.

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