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App Store Drama: Good News For Apple’s Services Segment

Scrutiny from Epic Games led Apple to lower its App Store commission charged from smaller developers. But in the end, the impact to financial results may be too little for Apple investors to care.

The “epic drama” between Epic Games and Apple may not have amounted to much after all.

After Epic Games pressured Apple on its App Store commission policy, last year, the Cupertino company lowered its fees charged from smaller developers, from 30% to 15%. It seemed like a sign of good faith paired with an attempt to “lower the temperature” on the issue, as companies like Facebook, Microsoft and Spotify started to pile on.

I worried what this could mean for the highly profitable App Store, especially if the commission discount were to be extended to other groups of developers:

“Any changes to the App Store’s business model or monetization policies that arise from this fight could be a bearish development for Apple’s stock. Therefore, I believe that investors should keep tabs on how the dispute evolves.”

Now, research company Sensor Tower has put some numbers around Apple’s initiative to discount the commission, and the impact to the company seems minimal: about 2.7% of an estimated $22 billion in App Store fees in 2020.

App Store: doing some math

My estimate of the App Store’s contribution to Apple’s total revenues is a bit more conservative than Sensor Tower’s total fee number suggests: about 6%, or roughly one-third of service segment revenues. See light blue slice in the pie chart below:

Full year revenues, actuals and estimates.

Full year revenues, actuals and estimates.

Should Sensor Tower be right about the impact of the commission discount, we are looking at a total company top-line hit of less than 0.2% going forward, per my calculations and assuming no change to the policy. For reference, Apple’s revenues grew 5.5% during the pandemic year, in total.

The hit to the service segment could be a bit more noticeable. In fiscal 2020, service revenues grew 16%, after having climbed 24% in the previous year. I estimate that the App Store discount could cause a negative impact of one percentage point per year.

Beyond revenues, lowering developer commissions could be felt most in the bottom line. Since I believe that the App Store has just about the best margin profile in Apple’s product and service portfolio, the hit to revenues could trickle straight down to margins.

If I were to assume full impact to profits, the App Store commission discount could lead operating margins lower by 20 basis points, or 0.2 percentage points.

What this means to Apple investors

The above boils down to this: lowering App Store commission certainly has an impact on Apple’s financial performance. But the effect seems too small to matter. Those who are inclined to investing in Apple stock should not change their minds based on this App Store matter alone, in my view.

In the end, I maintain my opinion about Apple shares, as outlined in my roadmap, on March 16:

  • At the current price of $125 per share, Apple is probably a stock to hold over a multi-year period, due to robust fundamentals and compelling growth opportunities;
  • If the stock dips below $120 (it traded for as low as $116 as recently as March 8), investors may be faced with an even better investment proposition;
  • If the stock climbs above $130 and towards the peak, investors could still own shares with confidence, but they may need to scale back on future return expectations.

Twitter speaks

Epic Games CEO Tim Sweeney was not very happy about Google’s recent move to lower its own commissions charged from small developers, following Apple’s lead. Here is what he had to say:

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)