Apple continues its drip strategy of making minimal App Store changes in response to each individual antitrust threat it perceives – and Morgan Stanley analyst Katy Huberty unsurprisingly expects recent developments to have minimal impact on the company’s bottom line.
In a note to investors, Huberty looks at four recent antitrust developments, and estimates the likely hit to Apple’s financial performance …
In a note seen by PED30, she outlines the four things that happened in the last 10 days.
- The settlement of a lawsuit with Cameron et al, which allows developers to communicate with their customers about alternative payment options outside of their iOS app, and expand the number of price points available to developers from <100 to >500 (developers will continue to set their own prices)
- The passing of the South Korea Telecommunications Business Act, which will ban app store operators (i.e. Apple and Google) from forcing developers to use their online payment systems
- The launch of an anti-trust case against Apple (over in-app payments) at the Competition Commission of India
- An update to the App Store that will allow developers of “reader” apps only (reader apps provide previously purchased content or content subscriptions for digital magazines, newspapers, books, audio, music and video) to include an in-app link to their websites for users to set-up or manage an account (i.e. circumvent the App Store for subscriptions), which closes an investigation by the Japanese Fair Trade Commission, though changes were made globally.
She says that, of the four, the reader app update is the most significant in terms of its potential financial hit. However, even there, the impact is likely to be small.
We estimate their financial impact to Apple is negligible at just 1-2% of EPS, at worst.
In our view, the reader app update that settles the JFTC investigation was the most important announcement as it provides app developers a path to circumvent payments on App Store.
For context, this business model isn’t new as Netflix and Spotify already disabled payments for new subscribers through Apple’s App Store billing platform (SPOT since 2016; NFLX since 2018); meaning Apple hasn’t been collecting a cut of the economics for new subscribers of either app for at least 3 years.
While more developers may consider this path under new rules, App Store revenue from the largest Reader Apps – including, entertainment, music, books, and news apps – is relatively small. The top 10 reader apps account for less than 8% of App Store revenue while the top 20 account for 10% and top 50 account for 13% of App Store Revenue, suggesting the financial risk to Apple from these developers circumventing App Store payments is fairly small.
We view the top 10 or so apps as those that are most likely to have the scale, brand, marketing budget, and customer loyalty to absorb the friction of circumventing the App Store payments platform. Assuming a worst case scenario in which Apple stopped collecting economics from all of the top 20 reader apps translates to downside risk of 4% of Services revenue, 1% of total company revenue, and about 2% of FY22 EPS forecast.
On that basis, she maintains her $168 12-month price target for AAPL.
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