A California district judge struck a blow to one of Apple’s (AAPL) major revenue engines on Friday by ruling that the iPhone maker needs to give app developers the ability to offer alternative app payment options to consumers.
Apple currently restricts developers to using its own Apple payment service, which automatically draws a 30% commission from the sale of apps. Developers including Spotify (SPOT) have complained of the commission for years, but the ruling by District Judge Yvonne Gonzalez Rodgers means app developers will soon be able to offer their own in-app payment options to consumers.
If consumers chose to buy apps outside of the App Store, it would cut Apple out of the equation. That means it would no longer be able to collect that 30% commission on app sales, or a lower 15% commission it collects on companies that make less than $1 million a year.
“The ruling is a major black eye for Apple and changes the economics of the store for the company,” Patrick Moorhead, president Moor Insights & Strategy, told Yahoo Finance. “It’s a major win for companies that don’t want to be forced to use its payment mechanisms. Freedom prevailed today.”
Despite the ruling, though, Wall Street’s reaction was relatively muted. Apple’s stock price fell just more than 2% following the announcement. And some analysts say any losses won’t hurt Apple in the long run.
Apple CEO Tim Cook gestures from the elevator as he arrives to speak during a weeks-long antitrust trial at federal court in Oakland, California, U.S. May 21, 2021. REUTERS/Brittany Hosea-Small ·Brittany Hosea-Small / reuters
For its part, Apple focused on the fact that the judge found it did not have a monopoly in the market for mobile games. "Today the court has affirmed what we’ve known all along: the App Store is not in violation of antitrust law," Apple said in a statement. "As the court recognized ‘success is not illegal.’ We remain committed to ensuring the App Store is a safe and trusted marketplace that supports a thriving developer community and more than 2.1 million U.S. jobs, and where the rules apply equally to everyone."
According to Sensor Tower, consumers spent $72.3 billion on apps in the App Store in 2020. During his testimony, Epic’s expert witness Ned Barnes said that Apple sees profit margins of more than 70% from the App Store, though the company does not release exact revenue from the platform. Instead, it wraps the App Store into its Services segment, which pulled in $17.48 billion of Apple’s $81.43 billion in total revenue for its most recent quarter.
Still, some experts see Apple’s loss as temporary at worst.
“In the end, I expect this to have at most a 2% headwind to overall revenue and 4% to earnings,” Loup Ventures’ Gene Munster told Yahoo Finance.
Epic Games CEO Tim Sweeney. (Photo by Philip Pacheco/Getty Images) ·Philip Pacheco via Getty Images
“After the first year of these changes, App Store growth rates will return to normal. Bottom line, it’s at most a one year headwind and does not change the big picture of where Apple is going over the next five years.”
According to Munster, consumers aren’t likely to use third-party app payment options, because Apple’s service is already straightforward enough.
“Consumers are lazy and payment with Apple's walled garden is easiest,” Munster said.
Wedbush analyst Dan Ives, meanwhile, says that while Apple is facing potential revenue headwinds of between 3% and 4%, the fact that the ruling specifically stated that Apple isn’t a monopolist is a win for the company.
“The monopoly worries have been an overhang over the stock and this ruling helps Apple in that way,” Ives said. “This is a win for Epic, Spotify, and others but for Apple a containable risk.”
The ruling in the Epic case, however, isn’t the only problem Apple’s App Store has to contend with. The European Union’s competition watchdog, the European Commission, also launched an investigation into the App Store after Spotify made complaints about the platform in 2019, and charged the company with violating competition laws in April.
The EC, however, still has to decide how it’s going to move forward, which could take years.
U.S. regulators, including Senator Amy Klobuchar (D-MN), have also called for changes to app stores, introducing bills that would impact how they operate. The Justice Department is also reportedly investigating Apple’s policies.
For Apple, the question now becomes how it will implement the judge’s order, if it doesn’t appeal the decision. Will it allow developers to put payment buttons directly in their apps? Will they make them link out to other sites to make payments? All of that could influence how users make their purchasing decisions, since an external link may be more cumbersome than Apple’s internal buttons.
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