As the growth of the services business accounts for a large part of the investment thesis of Apple (AAPL) over the long term, the antitrust lawsuit against the technology giant poses a major threat to its business model. The data simply does not prove that the case will be significant given the market landscape.
Supreme Court ruling
A few weeks ago, the US ruled The Supreme Court voted 5 to 4 to approve a case from 2011 The App Store is a monopoly that leads to artificially inflated prices, so that consumers continue to sue Apple for alleged cartel problems. The lawsuit has the potential to last for years, and could have a positive effect if future questions about App Store fees are resolved on a positive outcome.
Apple charges 30% for one-off purchases on the mobile platform and another 15% for subscriptions. Consumers discover apps through the Apple App Store, leaving the payment process to the technology giants. In doing so, Apple lends credibility to these apps, which in some cases may require massive marketing budgets from developers to enable consumers to discover and trust such apps in areas such as games without credible brands.
Morgan Stanley argues that traditional retail and IT distribution platforms charge similar margins for customers, so Apple complies with historical market norms. Even Alphabet (NASDAQ: toget) (togetL) through the Google Play Store charges similar fees.
Despite all concerns about privacy and security, Apple spokesman Josh Rosenstock points to the reasons A highly curated platform is beneficial for both developers and consumers:
We're proud to say that To create the safest, safest and most trusted platform for customers and a great business opportunity for all developers around the world.
The real risk to the App Store business is workarounds that companies such as Netflix (NFLX) and Epic Games are using to circumvent Apple commissions paid. According to TechCrunch Netflix posted sales of $ 853 million in the App Store. Apple earned $ 127 million in subscription fees based on a 15 percent quota.
Netflix generated $ 16 billion in revenue in 2018, so only a small proportion of subscriptions were subscribed and paid directly through the App Store. The problem with the streaming service is that consumers have become accustomed to using the feature that has led to a significant increase in the so-called Apple tax in recent years. Morgan Stanley expects revenue growth to stall in the last quarter (via Business Insider ).
According to CEO Tim Cook, the largest developer (probably Netflix) in the FQ4 & # 18; 18 accounts for only a fraction of service revenue, which has recently surpassed $ 11 billion a quarter and $ 45bn USD on an annual basis. Mr. Cook sees a tremendous benefit for developers through tools and marketing for consumers, who can aggregate payments to a trusted business provider, rather than sharing private payment information with dozens of unfamiliar companies.
And this is how it will be – no doubt there were already some big developers in my opinion who came to the conclusion that they could do something on their own. We agree with that. I think Luca mentioned in his comments that the biggest ones – if I look at the biggest developers, make them less than 0.3% of service revenue so it's probably good to think in this context Obviously, there are millions of apps in the store and 30,000 subscription apps.
As mentioned earlier, the CFO shared these statistics earlier in the call:
We now have 330 million paid subscriptions on our platform, an increase of over 50% over that Previous year . We are very pleased not only with the growth, but also with the breadth of our subscription business. In fact, there are 30,000 third-party subscription apps available today on the App Store, and the largest of them account for less than 0.3% of our total service revenue .
The CFO added this extra detail The recent second quarter 19 earnings response shows that subscription services through the App Store have not slowed down despite the attempt of large developers to avert Apple subscribers:
Subscriptions are a strong driver our service business. We reached a new high of 390 million paid subscriptions in late March, an increase of 30 million in the last quarter alone.
Not until March, Apple announced the launch of new services. The company released Apple News +, Apple Arcade, and Apple TV +, which are expected to further expand subscriber growth this June, or through these workarounds. Bloomberg estimated a 21% drop in profits with a 5% to 15% cut in revenue.
Both risks seem unlikely, as Netflix's actions prove that circumventing payments through the App Store is feasible and the price charged by Apple is fairly normal. Otherwise, more apps would go Netflix and bypass the services offered by Apple through App Store payments.
The most important factor for investors is that rising App Store revenues are not jeopardized. The recent decline of the stock to below US $ 180 again brings with it the risks of the commercial war with China, but Apple will survive and thrive as subscriptions continue to rise.
The stock traded several times over US $ 210 in the US last year, and investors should expect such a rally when a solution with China is reached. Any weakness in the stock market caused by cartel-related headlines related to the App Store is a clear buying opportunity due to the diversification of the platform and the added value for consumers and developers.
Disclosure: I am / we are long AAPL. I wrote this article myself and it reflects my own opinion. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.
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