How Apple Stole Pages from Microsoft's Monopoly Playbook

A. Apple launched the iPod, iTunes, and the iTunes Store against the backdrop of United States v. Microsoft

26. When Apple began developing mobile consumer devices, it did so against the backdrop of United States v. Microsoft, which created new opportunities for innovation in areas that would become critical to the success of Apple’s consumer devices and the company itself. For example, the iPod did not achieve widespread adoption until Apple developed a cross platform version of the iPod and iTunes for Microsoft’s Windows operating system, at the time the dominant operating system for personal computers. In the absence of the consent decree in United States v. Microsoft, it would have been more difficult for Apple to achieve this success and ultimately launch the iPhone.

27. On May 18, 1998, the Justice Department and the attorneys general of 19 states and the District of Columbia filed United States v. Microsoft, an antitrust lawsuit against Microsoft alleging that the company had violated Section 2 of the Sherman Act by monopolizing the market for Intel-compatible personal computer operating systems. At trial, the government successfully established that Microsoft took steps to undermine the competitive threats posed by “middleware,” such as web browsers like Netscape, after recognizing that if users could use middleware to access a variety of content and services via remote servers, over the internet, they might be less reliant on Windows.

28. Microsoft also took steps to undermine cross-platform technologies like QuickTime, a software architecture developed by Apple to play multimedia content (e.g., music and videos) on Apple’s Mac computers and Microsoft’s Windows PCs. In particular, Apple’s then-Senior Vice President of Software Engineering testified that Microsoft “[wrote] steps into its operating system to ensure that a QuickTime file will not operate reliably on Windows,” “trick[ed] the user into believing that QuickTime technology is part of the problem actually caused by the Windows operating system,” and “introduced greater technical incompatibilities between QuickTime and Microsoft products.”

29. In April 2000, the trial court ultimately found that Microsoft’s conduct violated Section 2 of the Sherman Act. An appeals court upheld the district court’s findings of liability regarding middleware.

30. In January 2001, Apple introduced iTunes, software built on Apple’s QuickTime architecture, and advertised it as “Jukebox Software” for organizing and listening to music. The initial version of iTunes was only compatible with Apple’s Mac computers.

31. Later that same year, Apple debuted the iPod, a portable digital audio player that worked alongside iTunes to “let[] you put your entire music collection in your pocket and listen to it wherever you go.” Like iTunes, the initial iPod was only compatible with Mac computers.

32. On November 1, 2002, the trial court accepted a proposed consent decree in United States v. Microsoft. Among other things, the consent decree prohibited Microsoft from retaliating against companies for developing or distributing products such as browsers and media players. The consent decree also required Microsoft to make various APIs available to third-party developers, including Apple.

33. Following that consent decree in October 2003, Apple launched a cross-platform version of iTunes that was compatible with the Windows operating system. As a result, a much larger group of users could finally use the iPod and iTunes, including the iTunes Store. The iTunes Store allowed users to buy and download music and play it on their iTunes computer application or on the iPod. Apple benefited substantially from this new customer base. In the first two years after launching the iPod, Apple sold a few hundred thousand devices. The year after launching a Windows-compatible version of iTunes and gaining access to millions more customers, Apple sold millions of devices. Apple went on to sell hundreds of millions of iPod devices over the next two decades. Moreover, iTunes became the market leader in online music services. At an event in 2007, Apple’s then-CEO said of the iPod, “it didn’t just change the way we all listened to music, it changed the entire music industry.” At the same event, he announced that the company would change its name from Apple Computer, Inc. to Apple, Inc. in light of its shifting focus to consumer electronics rather than computers.

34. The ubiquity of iPod and iTunes on Windows, in part because of a successful antitrust enforcement action against Microsoft, contributed to the development and success of Apple’s next flagship product—the iPhone. But after launching the iPhone, Apple began stifling the development of cross-platform technologies on the iPhone, just as Microsoft tried to stifle cross-platform technologies on Windows.

35. In January 2007, Apple debuted the first-generation iPhone, describing the device as “an iPod, a phone, and an internet communicator,” and touting the fact that users could “sync[] content from a user’s iTunes library on their PC or Mac.” Apple marketed the iPhone as a smartphone that was easy to use. Reflecting on the company’s learning from the iPod, Apple’s then-CEO announced, “iTunes is going to sync all your media to your iPhone—but also a ton of data. Contacts, calendars, photos, notes, bookmarks, email accounts.”

36. The original iPhone cost approximately $299—approximately $450 in 2024 dollars adjusted for inflation—with a two-year contract with a phone carrier.

37. At launch, nearly all native apps for the iPhone were created by Apple. There were only about a dozen apps overall, including Calendar, Camera, Clock, Contacts, iPod, Messages, Notes, Phone, Photos, Safari, Stocks, Voice Memos, and Weather.

38. Within a year of launching the iPhone, Apple invited third-party developers to create native apps for the iPhone. Apple released its first software development kit—essentially the digital tools for building native apps on Apple’s operating system (iOS)—to encourage and enable third-party developers to create native apps for the iPhone. Apple also offered developers ways to earn money by selling apps and later in-app purchases and subscriptions. By 2009, Apple was running marketing campaigns highlighting the value that third-party apps provide to iPhone users with the trademarked slogan: “There’s an app for that.”

39. Apple’s decision to invite third-party participation on its iPhone platform benefited Apple, too. The proliferation of third-party apps generated billions of dollars in profits for Apple and an iPhone user base of more than 250 million devices in the United States. Apple’s market shares—over 70 percent of the performance smartphone market and over 65 percent of the broader smartphone market—likely understate its monopoly power today.

40. While Apple profits from third-party developers that increase the iPhone’s value to users, Apple executives understand that third-party products and services can, in their own words, be “fundamentally disruptive” to its smartphone monopoly, decreasing users’ dependence on Apple and the iPhone and increasing competitive pressure on Apple. Apple therefore willingly sacrifices the short-term benefits it would gain from improved products and services developed by third parties when necessary to maintain its monopoly.