WASHINGTON, DC - MARCH 21: U.S. Attorney General Merrick Garland speaks during a news conference at ... [+]
The Department of Justice’s lawsuit alleging that Apple violated U.S. antitrust law has contributed to a 7.2% decline in the company’s stock so far in 2024. During that same time the Nasdaq rose 11.2%.
The lawsuit is a lagging indicator of a company that is too dependent on the iPhone — a hit product that launched 17 years ago. The maturity of Apple’s hardware products — which suffered a 3% decline in the company’s fiscal 2023 — is reflected in the company’s negligible revenue growth over the last six quarters.
For several years Apple stock growth has been propelled by two tactics:
- Locking in some customers to the iPhone by imposing high costs on those who want to switch vendors and adding new services.
- Stock buybacks to attract and keep the likes of Warren Buffett as an investor.
With Buffett selling some of his Apple stake in the last quarter of 2023 and Apple revenues stagnating after a decade of 16% average annual growth, what could catalyze the company’s revenue acceleration and stock price?
With $73 billion in cash and equivalents at the end of 2023, Apple could keep buying back more stock. Apple’s only source of growth last year was its services business that grew 9% to $65 billion, according to the company’s 2023 10-K form.
Apple’s services business accounted for only 22% of the company’s revenue —and a third of its profit. The DOJ’s antitrust lawsuit could threaten to snuff out growth in Apple’s services — thus dimming hopes for restoring the company’s top line growth.
“At Apple, we innovate every day to make technology people love—designing products that work seamlessly together, protect people’s privacy and security, and create a magical experience for our users,” an Apple spokesperson said in an emailed statement.
The DOJ’s lawsuit would “set a dangerous precedent, empowering government to take a heavy hand in designing people’s technology. We believe this lawsuit is wrong on the facts and the law, and we will vigorously defend against it,” the Apple statement concluded.
Evaluating The Antitrust Lawsuit
The DOJ alleges Apple used its monopoly power in the smartphone market to lock out rivals from providing iPhone customers complementary products and services such as “super apps [that provide payment, instant messaging, and other services], cloud streaming game apps, third-party messaging apps, smartwatches, and digital wallets,” according to The New York Times
The DOJ applied similar logic to its 1998 to 2001 antitrust lawsuit against Microsoft
The DOJ’s lawsuit charges Apple with limiting “finance companies’ access to the phone’s payment chip and Bluetooth trackers from tapping into its location-service feature,” wrote the Times.
Moreover, the government alleges Apple makes it easier for users to connect its own smartwatches and laptops to their iPhone while creating obstacles for rival companies. The barriers Apple imposes on customers seeking to buy rival products and services have “built and reinforced the moat around its smartphone monopoly,” the government wrote in the lawsuit.
Apple defends its strategy — arguing these practices make iPhones more secure than other smartphones. “This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets,” the Apple spokesperson wrote via email. “If successful, it would hinder our ability to create the kind of technology people expect from Apple—where hardware, software, and services intersect.”
The DOJ alleges Apple’s conduct harmed consumers and developers. For consumers, the DOJ wrote “that has meant fewer choices, higher prices and fees, lower quality smartphones, apps and accessories, and less innovation from Apple and its competitors. For developers, that has meant being forced to play by rules that insulate Apple from competition,” noted the Times.
What The DOJ’s Lawsuit Highlights
A key principle of antitrust law is this: It is not per se illegal to build a monopoly position; however, it is illegal to use monopoly power to make consumers worse off.
While the DOJ’s complaint does not provide compelling details to quantify how much Apple may be overcharging consumers, I have observed some financial concerns about its products in my classroom.
How so? Over the last several years, I have taught three business cases about Apple each semester in my strategy class. My undergraduate students told me they feel like fools for being locked in — via the iPhone — to Apple’s ecosystem, I wrote in a February 2023 Forbes post.
They would rather own a product that costs less and works better. Many said they have their entire online life — such as messaging, social media, online payments, and more — on their iPhones and MacBooks.
Their iPhone’s performance degraded so much that within two years they felt compelled to overpay — say, $1,000 — for a new one that lacked new features worth paying that much to own.
Students also told me about the social stigma associated with what Bloomberg called the “green bubble effect.” In messages sent from Apple’s iMessage app to smartphones that run Google’s Android operating system, the text appears as a green bubble. That's different than the blue one Apple users receive when messages are sent between iPhones, noted Bloomberg. With smiles on their faces, students told me their peers teased them when the green bubbles appeared.
While some students said they would like to switch to a less expensive smartphone — say, a $600 Samsung — they judged the cost of exiting the Apple ecosystem to be too high. So, they stayed locked in to what they saw as a bad bargain.
What The DOJ’s Lawsuit Lacks
The DOJ’s lawsuit does not offer compelling new evidence. Perhaps the government is waiting to present that evidence in what could be years of litigation.
The good news for Apple is the company has successfully fended off previous antitrust challenges. In 2020, for example, Fortnite-maker, Epic Games sued Apple over its App Store policies. Apple prevailed by convincing the judge customers “could easily switch between its iPhone operating system and Google’s Android system,” noted the Times.
Apple has defended its strategy in other ways. For example, the tech giant presented data to show few customers change phones. The reason? They are “loyal” to Apple, noted the Times. The company also cited the millions of new businesses the App Store created following its 2008 launch — highlighting the 374% growth to 5.2 million paid app makers in the last decade, the Times reported.
Moreover, the DOJ lawsuit alleges Apple’s market share by revenue in the performance smartphone market tops 70% and exceeds 65% for all smartphones.
That strikes me as very high. After all, independent data providers suggest Apple’s market share is much lower and Samsung’s smartphones have enjoyed a market share edge over the iPhone for most of the last decade.
For example, in 2007, Nokia led the smartphone market with a 50% share. That year Apple launched the iPhone and since 2013, Apple and Samsung shared the smartphone market lead. Samsung’s market share soared from 3% in the second quarter of 2009 to 32.2% in the second quarter of 2012, according to a chart on Statista.
In 2023, Samsung accounted for 19.4% of the smartphone market — it fell slightly behind Apple, which took the top spot — with 20.1% market share — for the first time since 2010, according to T_HQ.
These market share figures seem to refute the DOJ’s proposition that Apple has a monopoly in smartphones. Yet my anecdotal evidence from students who are locked in to the iPhone ecosystem suggest something is amiss.
The Apple antitrust suit differs from the Microsoft one in that the software giant more clearly dominated the industry in the 1990s — with 95% market share, according to the Wall Street Journal.
Colin Kass, an antitrust lawyer at Proskauer Rose told the Times that one element of the case against Apple resembled the DOJ’s Microsoft suit: the government’s allegation “that Apple could be contractually preventing rivals from developing apps that work with other app providers, as ‘super apps’ could.”
Another expert considers the DOJ’s complaint to be fairly weak. “The whole notion here is that things that make Apple distinctive are also things we should be attacking under the antitrust laws,” Herb Hovenkamp, an antitrust expert and a professor at the University of Pennsylvania law school, told the Journal.
Indeed, legal experts noted that laws do not prevent companies from favoring their own products and services. As the Times reported, Kass asked, “Can the antitrust laws force a company to redesign its product to make it more compatible with competitors’ products?”
Within 60 days of the suit’s filing, Apple plans to file a motion to dismiss the case. The company’s filing will follow the logic of Kass’ question: Competition laws permit companies to adopt policies that improve their customers’ experience with the product — even if rivals oppose the design, noted the Times.
Are Apple’s Buybacks Enough To Keep Buffett From Selling?
Buffett famously violated his rule against investing in technology stocks when it came to Apple. Berkshire has made a good return on its Apple investment — enjoying a 367% increase in the value of its Apple holdings between the end of 2018 and February 2024, noted the Journal.
Yet, he does not hold all his positions forever. Berkshire Hathaway sold about 1% of its Apple shares in the final quarter of 2023 — leaving his company with a 5.9% stake in the tech giant, according to the Journal.
I doubt the DOJ’s lawsuit makes Buffett feel any better about his huge Apple stock holdings. When Berkshire releases its next 13F filing, investors may learn whether Buffett’s company has further trimmed its position in the iPhone maker’s stock — which was worth $157 billion on March 22.
How much of Apple’s stock price appreciation is due to stock buybacks? Berkshire’s investment in Apple roughly coincided with a big increase in Apple’s stock buybacks, which increased from about $6 billion a quarter in 2017 to more than $20 billion in the second quarter of 2018. Since then, Apple’s stock buybacks have totaled a whopping $415 billion, according to YCharts.
Can Apple Grow Faster?
To raise its share price, Apple must revive its growth. Yet the company faces considerable obstacles to growing faster. “Services has been the driver of growth for Apple, with huge margins, and there’s a question of where the business goes from here,” Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, told Bloomberg.
“I hope they can limit the damage as much as possible, because we don’t see any new growth drivers on the horizon and the stock still looks expensive,” Ghriskey added. “It could be dead money for a while.”
Apple’s revenues are poised to decline for the fifth quarter out of the last six. Revenue for Apple’s second quarter is anticipated to drop 4.5% to $9.5 billion, noted Bloomberg.
The list of investor concerns for Apple includes:
- Weak sales in China;
- Lagging position in artificial intelligence;
- Few catalysts for growth in the wake of a Bloomberg News report that Apple canceled its electric car project and has limited revenue prospects for the company’s Vision Pro headset; and
- Regulatory concerns — most recently the DOJ’s antitrust lawsuit.
“There’s still a lot of value in the brand, but it is underperforming, has weak growth, a lot of headline risk, and it’s not even cheap,” Eric Clark, portfolio manager at Accuvest Global, told Bloomberg. “Honestly, why hold it?”
