Why Apple will come to regret its privacy activism

There is an adage that cautions about planting seeds of discontent. You reap what you sow.

The Verge reported Tuesday that a pair of smartphone app developers are seeking class-action status to sue Apple (AAPL). They claim the Cupertino-based company maintains an improper monopoly over iPhone apps.

It’s part of a growing trend of legal complaints against Apple. This bears watching carefully.

For the better part of two years, Tim Cook, Apple’s globetrotting CEO, has been making the case that big technology companies should be regulated. Of course, at the time, he meant businesses other than Apple.

He has become a privacy evangelist, of sorts. Companies like Facebook (FB) and Alphabet (GOOGL), he contends, are weaponizing surveillance by building advertising software that tracks users across the web.

And thanks to the sensors inside iPhones and Androids, they’re doing it in the physical world, too. This data, combined with text messages and phone calls, is especially valuable.

Unfortunately, Apple’s real track record is not so great, either.


When given the opportunity to protect sensitive user data outside of the U.S., the company has repeatedly erred on the side of selling more iPhones.

When the Chinese state government demanded that Apple store the iCloud security keys locally, company managers consented, making actual surveillance of Chinese iPhone customers much easier.

A similar process is quietly unfolding in Russia, according to a report from Foreign Policy.

Despite this, Cook & Co. continue to play to user fears.

By conflating internet advertising with lost privacy, Cook has successfully weaponized the debate. He’s cleverly positioned Apple as a protector of consumers, arguing its product is expensive iPhones, Macs and iPads — not sensitive user data.

It’s a compelling argument, by design. So it must be somewhat of a shock in Cupertino that the company is now a target of app developers, government regulators and U.S. presidential hopefuls.

Code writers and regulators complain Apple is leveraging its control over the App Store to the detriment of consumers.

There is no way to get third-party software onto iPhones without the Cupertino stamp of approval. Every app is relentlessly reviewed, and when they do get the O.K., Apple demands as much as a 30% cut of most revenues, off the top.

Apple managers argue the review process benefits all iPhone users. It prevents malware and promotes a better user experience through more polished applications.

However, last month the Supreme Court rejected an argument from Apple lawyers trying to squash another case claiming the App Store was an illegal monopoly.

Sen. Elizabeth Warren, a legal scholar and Democratic candidate for president, has made the augment that Apple should either forfeit the App Store, or not build apps that compete with developers. She contends that the 30% fee amounts to a punitive tax for developers, and/or gives Apple an unfair advantage.

Apple Music competes head-to-head with Spotify (SPOT) on iPhones. The Swedish music-streaming giant has amassed approximately 100 million paying customers.

New York Magazine reported in March that Spotify managers filed a formal complaint with the European Union, alleging Apple was acting as both a streaming music player and the referee. Cupertino takes advantages of the platform, and penalizes competitors with a different set of rules.


Apple Music, for example, is the default streaming option for iPhones. This selection can’t be changed, even for Spotify customers. Also, software engineers are denied access to iPhone APIs for the delivery of podcasts, and the ability to send push notifications offering savings.

And the advantages are certain to grow with “Sign in With Apple” — a new privacy-oriented, one-step sign-in button.

In theory, SWA — like the Facebook, Google and Twitter buttons that have become ubiquitous across the web — will let users log in to websites without providing an email address and other credentials.

The kicker is Apple plans to make this button mandatory for third-party App Store developers like Spotify.

As Ben Thompson, an analyst at Stratechery, points out, this means SWA is probably coming to websites and even Android apps.

Say what you want; that seems like a monopolistic move to me.

I haven’t been a fan of Apple shares for some time. I believe its transition to services is more style than substance. It’s hard for me to imagine its upcoming video-streaming service seriously competing with Netflix (NFLX), let alone the Disney (DIS) streaming behemoth coming later this year.

And app developers like Spotify already have a legitimate gripe with App Store limitations. SWA may be a bridge too far. By comparison, Google lets Android users change the default settings for maps, search, browsers and even the camera. Google login buttons are not mandatory.

Apple shares trade at just 14.1x forward earnings and only 3.2x sales. That may seem cheap relative to other large tech companies; however, future earnings are likely to fall as the company trades high margin iPhone sales for low margins services revenues.

While the stock may rally back toward $200 in the near term, I would avoid it. Pointing regulators toward big tech may be the single-worst move in the company’s long history.

Best wishes,
Jon D. Markman

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