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Netflix, PayPal, Others Could Benefit from the EU's Apple Probes

Though Apple may not see a major financial hit from the probes, they could have big implications for some iOS developers.

The antitrust probes just opened up by the EU against Apple  (AAPL) - Get Apple Inc. (AAPL) Report probably won’t do enormous financial damage to the tech giant. But companies such as Netflix  (NFLX) - Get Netflix, Inc. (NFLX) Report, Spotify  (SPOT) - Get Spotify Technology SA Report,  (AMZN) - Get, Inc. Report, Match Group  (MTCH) - Get Match Group, Inc. Report and PayPal  (PYPL) - Get PayPal Holdings Inc Report are still likely pleased to see them announced.

On Tuesday morning, the European Commission (EC) said that it’s probing Apple’s App Store and Apple Pay policies for possible breaches of EU competition rules. The moves follow the 2019 launch of a probe of Amazon’s marketplace practices, and the imposition of €8.2 billion ($9.24 billion) worth of fines against Alphabet/Google (currently being appealed) for alleged antitrust abuses.

The probes also arrive four months after Reuters reported that the Department of Justice (DOJ) has reached out to app developers about their interactions with Apple, as part of an antitrust probe of the company.

In the case of the App Store probe, which is said to follow complaints from Spotify and an unnamed e-book/audiobook distributor (possibly Amazon), the EU says it’s concerned about Apple’s insistence on the use of the App Store’s in-app purchase system for all digital content transactions happening on iOS/iPadOS devices, as well as Apple’s restrictions on letting developers inform users about alternate purchasing options, such as the developer’s website.

In the case of the Apple Pay probe, the EU says it’s concerned that Apple Pay is the only mobile payments solution on iOS/iPadOS devices that can leverage the tap-to-pay capabilities of the devices’ NFC radios. It’s also probing alleged restrictions on access to Apple Pay for unnamed rival products that work on iOS/iPadOS devices, and on how Apple’s “terms, conditions, and other measures” for supporting Apple Pay on merchant websites and apps “may distort competition and reduce choice and innovation.”

Apple’s stock is brushing off the news: As of the time of this article, it’s up 2.6% to $351.84, outpacing the Nasdaq’s 1.8% gain following the arrival of positive retail sales data. The fact that the EU’s probes threaten only a small fraction of Apple’s total revenue undoubtedly has much to do with the market’s response.

Of the roughly $260 billion in revenue that Apple generated in calendar 2019, its App Store transaction cuts (though believed to carry high margins) only appear to have accounted for about $15 billion of the total. Moreover, a large portion of this revenue likely came from gaming transactions for which it could be tough for many developers to disintermediate the App Store (should they have the option to) without losing much of their revenue. Research firm App Annie estimates that 72% of 2019 global app store spend (pegged by the firm to be around $120 billion) involved gaming transactions.

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Likewise, though Apple Pay has seen tremendous growth -- Tim Cook said on Apple’s Jan. 28 earning call that Apple Pay’s annual transaction run rate had topped 15 billion -- Apple reportedly only gets a 0.15% transaction cut. From all indications, Apple Pay isn’t run to be a major profit center in its own right, but to give consumers one more reason to stay loyal to the Apple ecosystem.

But while any financial impact on Apple from the EU’s probes is likely to be moderate, the impact could be bigger for some iOS/iPadOS developers -- particularly companies that depend heavily on digital content subscriptions.

The App Store, like Google’s Play Store, typically takes a 30% transaction cut (subscription purchases, for which the cut drops to 15% after the first year, are a partial exception). However, whereas Google allows Android developers to support alternative app-download and in-app purchase options, Apple doesn’t allow iOS/iPadOS developers to do the same.

As a result, whereas Amazon’s Android Kindle app allows logged-in users who have supplied Amazon with payment card info to make e-book purchases within the app, the iOS and iPadOS Kindle apps don’t allow users to do the same. And whereas Match’s Tinder revamped its Android app last year so that it no longer relied on the Play Store to handle subscription purchases (subscribers now enter their credit card info within the app), it hasn’t been able to carry out a similar move for its iOS app.

Should Apple have to change its App Store policies so that they’re closer to those of the Play Store, it would be a major positive for a company such as Match, which might be able to avoid giving Apple a 30%/15% cut on many of its subscription sign-ups. It would also be a clear positive for companies such as Spotify and Netflix, which (in spite of operating in very competitive markets) have stopped supporting iOS/iPadOS sign-ups in order to avoid giving Apple a subscription cut.

In addition, if Apple is required to allow rival mobile payments services to support the tap-to-pay capabilities of its NFC radios, it would be a positive for a company such as PayPal, which currently supports tap-to-pay on Android phones but not on iPhones.

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