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Three Questions

How Could the Lawsuit against Apple Shift the Smartphone Landscape?

Last month, the Department of Justice sued Apple, accusing the company of using its dominance to block competitive threats. We asked Prof. Fiona Scott Morton, the former chief economist for the DOJ’s Antitrust Division, how a successful suit would change the devices and services available to consumers.

iPhones on display
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People seem to really like their iPhones. What is the harm to consumers from the behavior that prompted the EU regulation and the Department of Justice lawsuit?

The iPhone is indeed a great product. I have one myself. Perhaps the easiest way to explain it is to consider how we would all feel if Motorola had been able to prevent the innovation that became the iPhone 20 years ago and, as a result, we were all carrying around Motorola phones today. We might be very happy with our useful Motorola phones and we would have no idea what we were missing, because the iPhone would never have been invented. It’s just hard to imagine innovation that has not happened—which is sometimes a barrier to bringing antitrust cases in the area of innovation.

But innovation like the iPhone is extremely valuable to consumers and therefore very much worth protecting. That innovation arises through competition between different companies all trying to capture the next generation of products and consumers. The DOJ complaint describes Apple conduct that denies Apple consumers access to services they want. Offering those services would provide viable entry paths for rivals. And those rivals would have the freedom, and incentive, to innovate in ways that are different from Apple, which would benefit end users. The next Apple might emerge. That lost innovation is the harm prompting the lawsuit.

How would you expect the smartphone landscape to change if these efforts are successful?

The early effects would be in services, where there are already developers wanting to launch third-party app stores and banks wanting to launch digital wallets. These could well be very exciting (interested readers can learn more from a paper I wrote for Bruegel). In a second stage, if we get app stores (or “super apps”) that hold many of the services a consumers uses on the handset, that consumer will find switching operating systems to be much less painful. And the ability to attract those consumers will stimulate entry in operating systems and handsets, though it is hard to predict what technological path will be followed (Google Android, an open source version of Android, or something else) or what business model will make the most sense (e-commerce, more advertising, something else)

Could Apple ultimately benefit in some ways from these changes?

I believe Apple would very much benefit from offering more digital wallets, more variety and types of app stores, and more functionality in messaging. These features would make the handset even more valuable and would allow Apple to sell more of them at a higher price. In addition, while entry would increase competitive pressure on Apple, it is a company that has proven it can innovate. The more competitive environment would likely stimulate more ideas and cause more products and services to be invented, increasing revenue. In this world, consumers would gain from more choice, variety, and a faster pace of progress, and the company would gain also.

Department: Three Questions