Shares of the streaming giant have kicked off 2019 on a low note, having fallen over 2% on Wednesday morning after a CFO succession plan and analyst skepticism have sparked the market response. Yet, the company's effort to circumvent Apple's iTunes fees could represent a significant positive for margin squeeze mitigation.
As a result of the move, first reported by VentureBeat, Netflix will be able to keep all of the subscription revenue coming in and avoid the "Apple Tax" that would represent a 15% cut to users moving through the app store. At one point, the tax represented up to a 30% cut to Apple.
"This should not come as a surprise," SunTrust analyst Matthew Thornton wrote on Wednesday. "As mobile-first countries and households rise in the mix, commissions to the mobile app stores become a material headwind to margins."
Some $256 million was paid to Apple in 2018 for App Store hosting, according to Sensor Tower, a mobile app intelligence provider. The savings from avoiding those payments will add to revenue saved from the company's eschewing of Alphabet's (GOOGL) Google Play store and its fees in early 2018.
The move away from the larger companies charging exorbitant fees could represent even larger savings in the future as consumers move to mobile-first entertainment more rapidly.
According to Pew Research, mobile streaming consumption doubled from 2012 to 2015 and continues to accelerate. Netflix has been a major beneficiary of this trend in recent years, growing mobile revenue nearly 100% year over year in its fiscal third quarter.
With a go-it-alone method, it could reap all of the benefits of this secular trend rather than paying up to Apple.
The effect on Apple's much touted services revenue could be more significant, as it represents the departure of its top earner from its flagship service platform.
The migration of Netflix away Apple's marketplace adds to concern over the app store stemming from the company's legal issues with monopolistic app store practices that now stand in front of the Supreme Court.
"When you're looking at the relationship between the consumer and Apple, that there is only one step. I mean, I pick up my iPhone. I go to Apple's App Store. I pay Apple directly with the credit card information that I've supplied to Apple. From -- from my perspective, I've just engaged in a one-step transaction with Apple. And when I come in and say Apple is a monopolist and Apple is charging a super-competitive price by -- by extracting a commission that it can only extract because of its market power, I mean, there's my one step."
- Justice Elena Kagan explaining her view of Apple's monopolistic practice in the Court's opening arguments.
The combination of legal issues that could break the business model and major revenue drivers leaving its platform could provide problems for those forecasting strengthening service revenue in 2019.
Apple shares were down on Wednesday morning, helping lead a broader market selloff to start the New Year.