App Store: A Problem For Investors?
The App Store is back in the news.
For a few days, the battle between Epic and Apple over App Store payment rules made investors uneasy. As I mentioned in September:
The topic died down for a couple of months, as earnings season and the launch of the iPhone 12 took center stage. Now, Apple has unveiled its App Store Small Business program, and the discussion is back on the table.
As a quick recap, Apple has been under fire primarily for charging a 30% commission from developers that generate certain types of revenue through the App Store. Companies like Epic Games believe Apple’s “revenue tax” to be an abuse of App Store power – a narrative that plays into the government’s antitrust case against Big Tech.
Now, Apple has announced that App Store commissions will be lowered to 15% for small businesses earning up to $1 million per year. The initiative seems targeted at diffusing overall developer discontentment, as well as weakening Epic’s and the government’s case against the platform.
Epic Games, a developer that will certainly not benefit from the new policy, was quick to express disapproval (see tweet below). The company’s CEO claims that the lower commission “divides app creators and preserve [Apple’s] monopoly”.
Regardless of whether this was Apple’s intention with the policy change, I think that Epic’s CEO is probably right about the consequences.
Revenue headwind? Time will tell
In my view, Apple’s move to change the compensation structure is smart. The company is showing the type of goodwill towards smaller businesses that will likely make Epic’s legal case weaker and antitrust accusations harder to support.
But, of course, Apple is paying a price. I conservatively estimate that the App Store represented about one-third of Apple’s revenues in the crucial services segment last year (see chart below). Slashing commissions in half should cause a drag to App Store sales, and possibly a noticeable decrease in service revenues in 2021.
But how much of a price is Apple paying, since the commission cut does not apply to all developers? The question is impossible to answer with accuracy, since the mix of developers making less vs. more than $1 million per year is unknown.
Bullish analyst Katy Huberty, from Morgan Stanley, has weighed in. According to her:
Should the analyst be correct in her estimates, Apple investors should not worry much about the recent developments. Keeping an eye on Apple’s fiscal second quarter results, which should only be reported in late April 2021, is the only way to know for sure.
Worth noting, Apple shares did not move much on the App Store news, tracking the Nasdaq index closely through most of Wednesday’s trading session.
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