Spyglass - Apple's Practical Fight

At its core, the DoJ's case against Apple seemingly would seek to undo a lot of what makes the iPhone the iPhone. Which is equal parts worrisome, weird, and wild. And so at the highest level, of course Apple is going to fight back against this. At the same time, what the government undoubtedly would and in some cases, probably should, go after are a lot of the out-of-date and out-of-touch App Store policies. Unfortunately, they know they likely can't do that – more on this below – so this, in some ways, is perhaps a proxy war, that will seek to bolster the EU's actual battle. With these specific arguments, the DoJ are like velociraptors hurling themselves at the fences to test them for weaknesses at Jurassic Park. They might not find a way out. But if they do... watch out. "They remember."

I, along with many others, have long wondered why Apple didn't simply get ahead of a lot of these complaints and eventual cases by proactively making changes to the App Store, which would have undoubtedly alleviated some, if not all of the current pressure. At the very least, such changes could have ensured that the all-important developer community stayed in their corner for such fights. But looking back at it now, I think there is one very clear reason why Apple hasn't done some of the obvious things to control the narrative, if not the regulatory winds. They can't afford to. I mean that quite literally. Services, which are primarily driven by the App Store, are the only real avenue of growth Apple has left right now.

With the Vision Pro officially out there and clearly not ready to move Apple's revenue needle any time soon, and with the Apple Car project now officially stalled out, Apple is out of options. While "AI, AI, AI, AI, AI, AI" hype can perhaps buoy the stock in a few months, it's going to be Services that actually has to carry the revenue bag for the foreseeable future. So again, Apple quite literally can't afford to take a major cut in App Store revenue and thus, Services revenue. Well, technically literally they could afford it. But their stock price cannot. And that matters more than you might think – again, more below – so this is all quite a practical matter.

In closing out his thoughts about the DoJ's case against Apple, Ben Thompson writes the following:

Last week this danger manifested, not as new legislation, but as this lawsuit, which attacks Apple’s integration much more than it attacks the App Store. I think, though, that it was Apple’s policies around the App Store that created the conditions for this lawsuit in the first place.

In short, I suspect the DOJ doesn’t want to follow in Epic’s footsteps, but they do want to sue Apple, so they framed Apple’s defining characteristic — integration — in the most uncharitable light possible to make their case. To put it another way, the Epic case may have shown that Apple’s policies around the App Store were (mostly) legal, but that didn’t mean they were right; now the DOJ, looking for another point of vulnerability, is trying to make the case that Apple’s right approach in delivering an integrated experience is in fact illegal.

I agree with this assessment. The actual lawsuit against Apple is full of seemingly random, cherry-picked items, some of which are full of factual leaps at best and holes at worst. Why? Again, it feels like they're sort of throwing a few different angles of antitrust attack out there to see if anything sticks with the courts. But in reality, what the DoJ wants – presumably, of course, but this should be obvious to everyone – is to go after the App Store. But as Thompson notes, they can't because Epic just lost on this angle of attack. Few things are more powerful than precedent in the US court system.¹ The DoJ has an uphill battle here, but using the same attack vector as Epic would have been potentially disastrous for the government, which is already under fire for their approach to bringing forward such cases.

The EU is going after the App Store directly by passing new laws, the DMA. Many of those rules are silly and arbitrary for their own reasons, but certainly it's a better approach if the intent is to bring about change in the App Store. I mean, it's already happening, for better or worse, in Europe.

But I also think Thompson and John Gruber, to whom he links here, downplay the importance of App Store revenue to Apple – especially at this moment in time. Again, I agree with the notion that Apple should change the App Store rules – and I've been saying this for years – most of them were put in place for a very different technological world, 15 years ago. And perhaps the key element, the 30% cut, was also completely arbitrary to begin with, dating back to Nintendo manufacturing video game cartridges! Apple didn't intend for the App Store to be a real money-maker for the company – words straight from Steve Jobs' mouth to our ears all those years ago. And while I think Apple should have changed many of these proactively to avoid the situation in which they currently find themselves, in the courts, all around the world, the situation is thus: 'Services' is currently the only real growth driver for Apple in terms of revenue.

The iPhone, iPad, Mac, and even Wearables, are all flat-to-down revenue-wise in recent quarters. The only thing that isn't: Services. And guess where the key portion of Services revenue comes from? The App Store. If Apple starts making all the changes to that model, that revenue is at risk. And Apple, already now being viewed as moving from a growth stock to a legacy, dividend-paying stock, fears falling even further in the eyes of Wall Street.

Boohoo, poor $2T company that was a $3T company, right? Who cares? Well, presumably all the 401ks and pension funds that own Apple stock. I don't think it's a stretch to say that Apple has probably been the most important stock in the world the past couple of decades. So this isn't all about the company needing to get bigger for bigger's sake, there's decidedly more weight behind this pressure.

Apple is trying to reverse their narrative, perhaps with cheaper MacBooks, certainly with Tim Cook visits to China, and of course, a fast and furious ramp of "AI, AI, AI, AI, AI, AI" talk, which they hope will crescendo at this year's WWDC, and will be music to the ears of Wall Street. We'll see. But the one thing Apple can control is that Services revenue, which unlike Apple's other businesses, compounds over time thanks to their base of users being bought in and upsold. Again, the App Store is key here. It may not always be – Apple Pay or "Apple Prime", anyone? – but it will be for the foreseeable future. And that's why Apple feels like it has to fight their App Store policy battles on every front, everywhere.

¹ Unless, apparently, you're the US Supreme Court looking at what was seemingly settled law.