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Are investors ignoring a real risk to Apple’s future?



Apple (NASDAQ: AAPL) seems to have it all after another quarter of blowout profit. However, Congress has several big tech companies in its sights – and regardless of your market cap, the government is bigger. Apple didn’t grow through big acquisitions and doesn’t completely dominate a system like this Amazon.com‘s (NASDAQ: AMZN) leader in e-commerce. However, Apple’s App Store appears to be a real antitrust risk that few take seriously.

Don’t go by, don’t collect $ 200

Congress is targeting four companies with antitrust concerns: alphabet (NASDAQ: togetL) (NASDAQ: toget), Apple, Amazon and Facebook (NASDAQ: FB). The central topic of the ongoing antitrust investigations It focuses on the unfair practices that any of these companies could be involved in.

Apps on the iPad

Image source: Getty Images.

Daniel Roberts of Yahoo Finance concluded that “Apple in particular has reason to be the undisturbed of the four when it comes to lawmakers threatening antitrust proceedings.” Unlike Apple, the other companies have made significant acquisitions or they clearly dominate a particular business. In theory, the government could force these Goliaths to divest previous acquisitions or change their business models.

However, these arguments seem to overlook the fact that a monopoly need not result from acquisitions. Consider the near-perfect example of Microsoft‘s (NASDAQ: MSFT) Antitrust issues in the 1990s. The company dominated PC operating systems and included its Windows Explorer browser with every copy of Windows. A federal district judge ruled that this binding practice was unfair and Microsoft should be split into two different companies. If a higher court had not reversed this decision, Microsoft today could be a very different company.

Most antitrust issues are resolved, at least in part, on the basis of the Sherman Antitrust Act. The law states that “only improper trade restrictions through acquisitions, mergers and foreclosure tactics” are a violation. That last point – Exclusion tactics – should worry Apple investors.

One of these things is not like the other

The four companies targeted by the government appear to have obvious differences in antitrust risk.

items

alphabet

Amazon

Apple

Facebook

Antitrust Concerns

Google search

Amazon online stores

Appstore

Facebook / Instagram

competition

Bing / Yahoo / others

Etsy (NASDAQ: ETSY) /. Wegmesse (NYSE: W) /. Overstock.com )

None

Twitter / Snapchat / LinkedIn / others

(Source: Investopedia. Table by author.)

The list above is not intended to be exhaustive, but we can see a clear difference between the four companies. While Google is the leader in traditional search, Facebook received 1.5 billion searches a day over the past year. And more consumers are starting their online shopping search on Amazon than anywhere else.

When it comes to Facebook, the pandemic-induced user growth is Twitter (NYSE: TWTR), Snapchat (NYSE: SNAP)Microsoft’s LinkedIn is likely to help fend off regulatory concerns.

What about Amazon As of the first quarter of 2017, at least 50% of Amazon’s sales have come from third parties. This seems to speak against an anti-competitive e-commerce giant. While it’s true that Amazon restricts third-party sales, so is it Ebay (NASDAQ: EBAY) – usually with a 10% final value fee, payment fees and other potential upgrade costs. When you choose Etsy, you’ll pay similar transaction and payment fees, listing fees, and more. It is also possible, if this is less desirable to customers, to sell through options like classified ads or other apps.

There is no other legal way for Apple to download and install an app on an iOS device. If a lack of competition is a monopoly, it could be a problem for the company.

Break a monopoly?

When you look at how the App Store works, the facts seem to pile up against Apple. Initially, Apple alone decides which apps are allowed in its store. According to the company, 60% of apps are approved, but 40% are rejected because of “minor bugs followed by privacy concerns”.

Second, Apple receives a commission of 15% to 30% depending on the situation. Without another option, developers pay or lose access to millions of iOS users. Apple goes to great lengths to say that 84% of its apps are free and developers pay nothing. However, there is an annual fee of $ 99 Be part of the Apple Developer Program.

Third, there are examples of brand awareness companies that can bypass the Apple toll, but smaller developers have no choice. For example, the Hey email app charges $ 99 annually but does not have the ability to pay through the App Store. Apple reportedly urged developers to add an in-app subscription option or face the app that was being removed.

In contrast, Netflix (NASDAQ: NFLX) and Spotify (NYSE: SPOT) Customers can no longer sign up for their service through iOS to avoid paying Apple fees. It seems that the App Store is the definition of a monopoly. If the government decides that is the case, today’s apple could be very different from tomorrow’s apple.

How antitrust measures could change Apple

In its most recent quarter, Apple had sales of $ 13 billion, a gross margin of more than 67%. However, a strong antitrust move could change some of the math. Apple Music costs about the same as its competition, but Apple doesn’t have to pay a 15% to 30% commission to sell its own service.

The European Commission is currently investigating Apple’s App Store practices. The preliminary investigation found that Apple Music’s competitors either removed their in-app subscription option or increased their prices in the app to pass the Apple fee on to customers. Apple’s app store review policy specifically states that subscriptions, in-game currency, or access to premium content must use in-app purchases. The requirement of using Apple’s in-app purchases, rather than allowing developers to use payment methods outside of Apple, is the definition of the “exclusion tactic” mentioned in the Sherman Antitrust Act.

Meanwhile, Apple Arcade’s curated games “will not be available on any other mobile platform or subscription service”. In addition, it is not possible to play these games on iOS without subscribing to Arcade. Although game developers obviously decide whether to participate in Arcade, they have little choice about the limitations. It’s not clear that certain games are platform-specific (many game consoles have titles that are only available on that particular system), but this isn’t a game or a couple of games – it’s around 100 games, essentially made by Android users are blocked and all non-arcade subscribers. The fact that some arcade games are available on PS4, Xbox One, and PC but not on Android seems to be stifling mobile competition.

Antitrust measures could force Apple to outsource the App Store or at least open its ecosystem. Opening the App Store to competition would mean app developers would have to charge less to compete effectively. This move would potentially slow sales growth and compress margins. A full spin-off would mean Apple would have to pay a commission for its services like Apple Music, which previously received a free ride.

With Apple stock trading at a forward P / E ratio of more than 33 – far higher than at any point in the last decade – it can’t really be called great value.

It’s hard to gauge how Apple will ultimately be affected by ongoing antitrust concerns. However, investors should be aware of this risk to the company’s future and adjust their expectations accordingly.




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