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Apple’s services pivot has summoned the lawyers

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:

Apple’s tough year just got worse.

At first glance, it may seem curious that the Justice Department is targeting Apple’s power in the smartphone market just as the company is trying to diversify from its marquee hardware. But Apple’s eye-popping growth in services — its impressive ability to extract more revenue from the periphery of its ecosystem — drives much of the hostility against it.

Sales of the iPhone still account for more than half of Apple’s revenue. But the services that tie into the phone are amassing an increasingly important role in the company’s business. For some of Apple’s more bullish analysts, the promise of the services segment is the narrative fuel behind Cupertino’s growth story and a pillar of its $2.6 trillion valuation.

That also explains the company’s strategic predicament. As Apple leans more heavily into generating value by keeping people within its system — from things like App Store commissions and subscriptions — the more scrutiny it draws to its business practices.

The antitrust suit is the latest challenge weighing on the company’s share price, which has flagged in recent months, in part on slowing iPhone sales in China.

Tech’s growth narrative has finally shifted away from phones/apps to AI, a theme aptly illustrated by Bank of America Global Research analysts who wrote Wednesday that their recent trip to Asia was the first trip in two decades “where smartphones were barely a part of the conversation.”

Services might be a long-term financial solution to the waning importance of the iPhone. It’s also an invitation for regulators to investigate monopoly power and test the strength of the “Walled Garden,” as Apple’s closed ecosystem is often called.

To Apple, the seamlessness of the iPhone experience reflects the security of its products and the vibrance of its offerings, a message it is counting on Steve Jobs disciple Phil Schiller to affirm. Riffraff does not make it past the App Store’s front desk, and Apple will not lend out jackets to any shady developers who show up flaunting the club’s rules. And like any club, its success comes from the members sticking around.

But to the users and developers aggrieved by the company’s practices (high club dues!) the walls are a means of exclusion. And even worse, that walled garden isn’t just keeping people out — it’s keeping people in.

Much of the conflict hinges on interpreting convenience or confinement, of attempting to prove loyalty or lock-in. Perhaps a drawn-out courtroom battle will spell out the spoils of Big Tech’s conquest: that years later, people can’t tell the difference.

Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on Twitter @hshaban.

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