Antitrust lawsuit highlights lost innovation as Apple stock drops Mojo

WASHINGTON, DC – MARCH 21: U.S. Attorney General Merrick Garland speaks at a press conference. [+] March 21, 2024 at the Department of Justice Building in Washington, DC. During the press conference, Garland and Justice Department officials announced that the department would take action against Apple, accusing the tech company of illegally monopolizing smartphones and violating antitrust laws. (Photo by Anna Moneymaker/Getty Images)

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A Justice Department lawsuit alleging that Apple violated U.S. antitrust laws caused the company's stock to fall 7.2% through 2024, while the Nasdaq rose 11.2%.

The lawsuit is a sign of the company's overreliance on the iPhone, a hit product it launched 17 years ago. Apple's hardware product maturity suffered a 3% decline in fiscal 2023, which is reflected in Apple's modest revenue growth over the past six quarters.

Over the past few years, Apple stock has been driven by two strategies.

Lock customers into iPhone by imposing high costs on consumers who want to change vendors. Stock buybacks to attract and retain people like Warren Buffett as investors.

Mr. Buffett will sell some of his Apple shares in the final quarter of 2023, and while Apple's earnings have stagnated after 10 years of average annual growth of 16%, what will accelerate the company's earnings and promote the stock price? Will it lead to?

Apple, which has $73 billion in cash and equivalents at the end of 2023, could continue to buy back more stock. According to Apple's 2023 10-K, Apple's only source of growth last year was its services business, which grew 9% to his $65 billion.

Apple's services business accounted for just 22% of the company's revenue and one-third of its profits. Sadly, the Justice Department's antitrust lawsuit threatens to erode the growth of Apple's services, dampening Apple's hopes for a return to revenue growth.

“At Apple, we innovate every day to make the technology people love, work together seamlessly, protect people's privacy and security, and deliver magical experiences to our users,” an Apple spokesperson said in an email. We design products that create

It would also set a dangerous precedent that would give governments greater power over the design of their people's technology. “We believe this lawsuit is wrong on the facts and law, and we will vigorously defend against it,” Apple's email concluded.

Evaluation of antitrust litigation

According to The New, the Department of Justice has found that Apple uses its monopoly power in the smartphone market to sell complementary products and services to the iPhone, including super apps, cloud streaming gaming apps, third-party messaging apps, smart watches, and digital wallets. It claims to have locked out rivals from offering it to customers. York Times New York Times.

The Justice Department applied a similar logic to its antitrust case against Microsoft MSFT from 1998 to 2001, alleging that the software giant used its operating system monopoly to lock users into its Web browsers.

The Justice Department's lawsuit accuses Apple of restricting financial companies' access to mobile phone payment chips and the use of location services features in Bluetooth trackers, the Times wrote.

Additionally, the government claims that while Apple makes it easier for users to connect Apple smartwatches and laptops to iPhones, it creates obstacles for rivals. The government said in its lawsuit that the barriers Apple imposes on customers trying to buy competing products and services strengthen and build a moat around the company's smartphone monopoly.

Apple has defended its strategy, saying these practices make the iPhone more secure than other smartphones. This lawsuit threatens who we are and the principles that make Apple products stand out in a fiercely competitive marketplace. If successful, an Apple spokesperson wrote, the company's ability to develop the kinds of technologies people expect from Apple at the intersection of hardware, software, and services would be hampered.

The Department of Justice alleges that Apple engages in practices that harm consumers and developers. For consumers, the Justice Department wrote, this means fewer choices, higher prices and fees, lower quality of smartphones, apps, and accessories, and less innovation for Apple and its competitors. For developers, the Times noted, that means being forced to follow rules that insulate Apple from competition.

The Justice Department's lawsuit is correct.

The key principles of antitrust law are: Establishing a monopolistic position is not itself illegal. However, it is illegal to use monopoly power to worsen the position of consumers.

The Justice Department's complaint doesn't provide any convincing details to quantify how much Apple may be overcharging consumers, but I've seen the harm in the classroom. I observed some of them.

Why? For the past few years, I've been teaching his three business cases for Apple every semester in my strategy class. Students in my department told me they felt stupid for being locked in via the iPhone-to-Apple ecosystem, I wrote in a February 2023 Forbes post. I wrote it in

They would rather own a product that is cheaper and has better features. Many of my students say they do everything in their online lives, including messaging, social media, and online payments, on their iPhones and MacBooks.

Students said the iPhone's performance had degraded so much that within two years they were forced to pay hefty sums, such as $1,000, for a new iPhone with no exciting new features.

Students also learned about the social stigma associated with the green bubble effect. When sending and receiving messages between iPhone's iMessage app and a smartphone running Google's Android operating system, text appears as green bubbles instead of Apple's blue bubbles when messages are sent between iPhone users. .

Some students told me they wanted to switch to a cheaper smartphone, say a $600 Samsung, but they decided the cost of exiting the Apple ecosystem was too high. So they remained locked into what they thought was a bad deal.

What's missing from the Justice Department's lawsuit?

The Justice Department's lawsuit provides no convincing new evidence. Perhaps the government is waiting to present its evidence in a lawsuit that could last years.

The good news for Apple is that the company has successfully avoided previous antitrust claims. For example, in 2020, Fortnite maker Epic Games sued Apple over App Store policies. Apple won the case by convincing the judge that customers could easily switch between its iPhone operating system and Google's Android system, the Times noted.

Apple has defended its strategy in other ways as well. For example, the tech giant presented data showing that few customers change their phones because they are loyal to Apple.

The company also noted the millions of new businesses the App Store has generated since its launch in 2008, highlighting a 374% increase in paid app creators to 5.2 million over the past decade, the Times said. The paper reported.

The lawsuit also alleges that Apple's revenue share in the high-end smartphone market is over 70%, and for smartphones overall it's over 65%.

I think that's very high. After all, independent data providers suggest that Apple's market share is much lower, and Samsung's smartphones have enjoyed a higher market share than the iPhone for most of the past decade.

For example, in 2007, Nokia led the smartphone market with a 50% share. That year, Apple launched his iPhone, and since 2013, Apple and Samsung have shared the lead in the smartphone market. According to Statista, Samsung's market share rose from 3% in the second quarter of 2009 to 32.2% in the second quarter of 2012.

According to T_HQ, Samsung will account for 19.4% of the smartphone market in 2023, just behind Apple, which topped the market for the first time since 2010 with a market share of 20.1%.

These market share numbers appear to refute the Justice Department's claim that Apple has a monopoly on smartphones. But my anecdotal evidence from students trapped in the iPhone ecosystem suggests something is wrong here.

According to the Wall Street Journal, the Apple antitrust case differs from the Microsoft case in that the software giant has more clear control over the industry with a 95% market share.

Colin Kass, an antitrust attorney at Proskauer Rose, said one element of the case against Apple is similar to the Microsoft case. The government's argument may be that Apple contractually prevents rival companies from developing apps that work with other app providers, similar to super apps, the Times noted.

Other experts believe the Justice Department's case is fairly weak. The whole idea here is that what makes Apple unique is also what we should attack under antitrust law, said an antitrust expert and professor at the University of Pennsylvania School of Law. Herb Hovenkamp told WSJ.

In fact, legal experts point out that the law does not prevent companies from giving preferential treatment to their products and services. As reported by the Times, Kass asked, “Can antitrust laws force companies to redesign their products to make them more compatible with competitors' products?”

Apple plans to file a motion to dismiss the lawsuit within 60 days. The companies' applications will likely follow the logic of Mr. Kass' question. Competition law allows companies to adopt policies that improve the customer experience of their products, even if rivals object to the design, the Times reported.

Will Apple's stock buybacks be enough to stop Buffett from selling?

Warren Buffett famously broke the rule against investing in technology stocks when it came to Apple. However, according to the magazine, Berkshire Hathaway sold about 1% of its Apple stock in the final quarter of 2023, leaving its Apple stake at 5.9%.

Once Berkshire releases its next 13F filing, investors may learn whether the company has further reduced its Apple holdings, which were worth $157 billion on March 22.

To be fair, Berkshire saw its Apple holdings grow 367% between the end of 2018 and February 2024, making a good return on its investment in Apple, the magazine noted.

But how much of the rise in Apple's stock price is due to stock buybacks? Berkshire's investment in Apple coincided with a significant increase in Apple's share buybacks, with approximately From $6 billion to over $20 billion in the second quarter of 2018. Since then, Apple's stock buybacks have totaled a whopping $415 billion. .

Can Apple grow faster?

Apple faces significant obstacles to growing faster. Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, told Bloomberg that while services have been a driver of Apple's growth and have been highly profitable, there are questions about where the business will go from here. He said there is.

With no new growth drivers in sight and the stock still looking expensive, we hope to limit the damage as much as possible. It may be dead money for a while.

Apple's sales have been negative for the past six quarters and are expected to decline again in the fifth quarter. According to Bloomberg, Apple's second-quarter sales are expected to fall 4.5% to $9.5 billion.

Investor's list of concerns for Apple includes:

Most of the growth is fueled by weak sales in China, lag among peers in the artificial intelligence space, and a Bloomberg News report that Apple has scrapped an electric vehicle project and limited revenue prospects for its Vision Pro headset. No, the Department of Justice's recent antitrust regulatory concerns litigation.

Eric Clark, portfolio manager at Accuvest Global, told Bloomberg that the brand still has a lot of value, but it's underperforming, has weak growth potential, has a lot of headline risk and is undervalued. He said it wasn't. Honestly, why keep it?

Sources 1/ https://Google.com/ 2/ https://www.forbes.com/sites/petercohan/2024/03/24/as-apple-stock-drops-antitrust-suit-highlights-lost-innovation-mojo/ The mention sources can contact us to remove/changing this article

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