What is the impact of the AppStore payments decision on Apple’s inventory?

A district judge ruled in the Apple

AAPL
v Epic Games last week, noting that Apple must allow app developers to offer links to alternative payment methods in apps sold through the AppStore. Until now, Apple’s own payment system has been the only option for developers, and Apple typically charges a commission of between 15% and 30%. However, the judge rejected Epic’s claims that the AppStore is a monopoly. It was actually the biggest legal risk for Apple and the news should be a major relief for investors. Apple stock is down about -3% in trading on Friday, which isn’t a big deal given that the stock remains up around 15% year-to-date and almost 30% in the last 12 months.

Now, the payments decision is a blow to Apple’s highly lucrative App Store business, which we believe accounted for around $ 18 billion in Apple’s revenue for fiscal 2020. It is probably safe to assume that Apple will lose a few billion in annual AppStore-related sales as developers seek to steer customers toward their own lower-cost payment options. However, we believe this is something Apple can handle in the long run for several reasons. First, many developers and customers might continue to prefer Apple’s in-house payment option, due to its convenience and seamless integration with the iPhone experience. Additionally, Apple’s services business has grown rapidly, with sales up 29% in the first nine months of FY21, in part due to the introduction of new subscription services. , which could help mask the longer-term impact of the blow on AppStore Revenue.

Our dashboard Apple Services Revenue estimates revenue figures for AppStore, Apple Music, Apple TV +, iCloud, third-party subscriptions, licensing, Apple Care, and Apple Pay.

[5/5/2021] What’s at stake for Apple as the Epic case goes to trial?

Apple’s highly lucrative services business faces its biggest legal challenge yet, as Epic Games’ lawsuit against Apple and its AppStore went to trial on Monday. Epic alleges that Apple’s AppStore is an anti-competitive marketplace, which blocks customers and diminishes revenues for mobile app developers. The game developer sued Apple in August 2020 after its popular game Fortnite was removed from the AppStore shortly after Epic let gamers bypass Apple’s in-app purchase system, thereby avoiding the commission of 30% on sales. So what is really at stake for Apple and its service business?

Apple relies more and more on the sale of digital services to increase its profitability and stabilize its revenues, which have been somewhat volatile in recent years. Services accounted for around 19% of Apple’s total revenue and around 31% of gross profits in its most recent quarter (Q2 FY’21). Apple has also launched a slew of new service offerings in recent years, ranging from fitness tutorials, paid podcasts, and video streaming. However, we believe that the AppStore and third-party subscription commissions, two key targets of the Epic lawsuit, still account for the bulk of its service revenue, since they mostly include commissions (typically 15-30% of the value of the Epic trial). ‘purchase ). We estimate that the two service revenue streams together accounted for about $ 23 billion of Apple’s estimated $ 54 billion in service sales last year. While we are not speculating on the possible outcome of the case, it is clear that Apple’s revenue would have a significant impact if it were forced to significantly cut commissions or allow app developers to bypass its. store.

Our dashboard Apple Services Revenue estimates revenue figures for AppStore, Apple Music, Apple TV +, iCloud, third-party subscriptions, licensing, Apple Care, and Apple Pay.

[8/17/2020] Epic lawsuit hits Apple stock where it hurts

Last week, Epic Games sued Apple (NASDAQ: AAPL) for antitrust violations, after its popular game Fortnite was removed from the AppStore shortly after Epic let players bypass the purchasing system. integrated Apple, thus avoiding the 30% commission on sales. Although Apple has had arguments with developers in the past, the Epic lawsuit is notable for several reasons. First, the Epic lawsuit comes at a time when tech giants, including Apple, are increasingly under scrutiny by regulators over their market power. Second, Apple is more dependent on its services business than ever, with hardware growth slowing (services profits grew 5 times faster than hardware profits in the first three quarters of fiscal 2020) , and Epic’s lawsuit targets Apple’s commissions, which we estimate is Apple’s most profitable source of income.

Apple made around $ 360 million in commissions from Fortnite over the past two years through Sensor Tower – a relative drop in Apple’s bucket that generated more than $ 260 billion in revenue last year. [1] However, if Epic sees a favorable judgment and if Apple is forced to reduce its commissions or change the terms of its AppStore, it will most likely set a precedent, leading other developers to demand similar terms.

So what could be the financial impact of an overall reduction in commissions by Apple? Apple is cutting app sales and subscriptions by 30% (15% from the second year of subscription) and we estimate total commission revenue to be nearly $ 20 billion over the course of the year. ‘fiscal year 19 (out of a total of approximately $ 46 billion in service revenues). . If Apple cut commissions by 20% from 30%, that would reduce total commissions from around $ 7 billion to around $ 13 billion. While the revenue impact is small for Apple (less than 3% of Apple’s total revenue), the profit impact would be more pronounced since commissions are likely to be almost entirely profit. We estimate that Apple’s operating profit would be around 10% lower if commissions were reduced, given that Apple posted operating profit of around $ 64 billion in FY19. .

Now, the 30% commissions are actually pretty standard in the industry – Alphabet’s Google (NASDAQ: GOOG), which is also facing a similar lawsuit from Epic, as well as Microsoft and Amazon, are charging roughly the same fees on sales of applications in their respective marketplaces. . However, Apple has the most to lose given the scale of its business. AppStore revenue is roughly twice that of Google’s Playstore.

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About John Villalpando

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