One of the several rulings that a U.S. federal court delivered on Friday for an antitrust lawsuit filed against Apple (AAPL) by Epic Games could end up taking a bite out of Apple's App Store revenue. But it's worth maintaining a sense of perspective.
Understandably getting a lot of attention: The court ruled that Apple can't prohibit developers from "including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing." An injunction enforcing this decision, which gives developers a way to sidestep the 15% to 30% App Store commissions Apple charges for digital content transactions, is set to go into effect in December.
However, the court also rejected Epic's other legal claims. Judge Yvonne Gonzalez Rogers declared that Apple isn't "an antitrust monopolist in the submarket for mobile gaming transactions." She also declared that Apple's termination of Epic's developer product licensing agreement (DPLA) following Epic's August 2020 implementation of an alternate payment system for Fortnite to be "valid, lawful, and enforceable," that Apple is free to terminate DPLAs with Epic at its discretion, and that Epic has to pay Apple 30% of any revenue it collected via its alternate payments system. (All of this helps explain why Epic CEO Tim Sweeney wasn't in a celebratory mood following the ruling.)
Nonetheless, Rogers' ruling in support of alternate payment methods led Apple's stock to fall 3.3% on Friday, amid a 0.9% Nasdaq drop. It also led shares of developers that depend heavily on App Store-driven revenue, such as Zynga (ZNGA) , Playtika (PLTK) , Bumble (BMBL) and Match Group (MTCH) , to shoot higher.
Here are a few thoughts on the Apple/Epic ruling.
1. A Lot Remains Up In the Air
Epic has already filed to appeal the parts of Rogers' ruling that went against the company. And there's a good chance that Apple will do the same. It also wouldn't be surprising to see Apple ask a court for a stay of Rogers' injunction order, pending its appeal.
In addition, the injunction is only enforceable in the U.S. It remains to be seen how Apple acts in international markets, which now account for a solid majority of App Store revenue.
And as The Verge's Nilay Patel highlighted, Apple and App Store developers might have different interpretations of what it means to insert "buttons" directing consumers to alternate payment mechanisms.
2. Different Types of Developers Might React in Different Ways
Larger developers that have strong brands and/or tend to possess customer relationships which extend beyond their mobile apps -- think companies such as Amazon.com (AMZN) , Netflix (NFLX) , Spotify (SPOT) and Roblox (RBLX) , some of which have long refused to support App Store-based payments -- could be quick to provide alternate payment methods for digital content transactions.
And more generally, developers offering access to subscription-based content services will probably be eager to avoid paying Apple a 15% or 30% cut on monthly and annual subscription payments. As it is, Apple recently announced a settlement with Japanese regulators under which it would let a lot of these developers (in Japan and elsewhere) link to their own websites, where they could process subscriptions using their own payment systems.
On the other hand, a lot of smaller developers might be more reluctant to add alternate payment methods to their apps -- both because they might not want to deal with all of the technical and operational headaches that would come from doing so, and because they might not want to make any changes that risk meaningfully reducing conversion rates or user satisfaction for apps that their livelihoods depend upon.
Likewise, many game developers relying on one-off, in-game transactions might prioritize conversion rates and user convenience more than their revenue cut. And games, it's worth noting, are responsible for 70% of all App Store revenue.
3. Apple Might Respond With New Rules
With Rogers refusing to declare Apple a mobile gaming monopolist and affirming the company's right to boot Epic from the App Store, it looks like Apple has a lot of leeway to impose new App Store rules to help offset the revenue it stands to lose from allowing alternate content-payment methods.
For example, Apple might require that any app supporting an alternate content-payment method also support App Store payments. Or -- borrowing a page from Alphabet (GOOGL) , which responded to an EU ruling that forced it to stop bundling certain Android apps by charging a licensing fee for its app bundle -- it could charge additional fees to developers that refuse to use the App Store for content transactions.
Of course, developers and/or regulators might respond to such rules with fresh antitrust challenges. And in the event that developers offering alternate payment methods have to also support App Store payments, they could give customers a discount for using the former. It's not hard to imagine such tit-for-tat actions going on for a while.
4. Apple Could See a Moderate Revenue Hit...But It's Unlikely to See a Massive One
In January, CNBC estimated (using Apple's disclosures about developer payouts) that the App Store had $64 billion worth of gross revenue in 2020, with Apple netting $19 billion of that sum. Those estimates might be slightly high, since they assume a 30% overall cut for Apple and the company has been charging 15% for certain transactions, but probably aren't too far off the mark.
With App Store spending believed to be growing at a healthy double-digit clip this year, Apple's 2021 App Store revenue might wind up in the low-$20 billion range. That in turn would make it equal to around 6% of Apple's calendar 2021 revenue consensus estimate of $369.8 billion, and (given that App Store revenue is believed to carry a relatively high margin) perhaps a high-single-digit percentage of Apple's 2021 gross profit.
Not all of that revenue is going to disappear even if developers worldwide gain the ability to support non-App Store payments for content transactions. Paid downloads will still have to go through the App Store, Apple might require that the App Store remain an in-app purchasing option for certain apps, and many smaller developers and game developers could stick with the App Store for in-app transactions.
But between Friday's ruling and all of the pressure that Apple and Google are now facing from app developers, the DOJ, various foreign regulators and even some state governments over their app store policies, odds look good that developers will be free to use their own payment systems in many large markets (if not everywhere) over time. And just maybe, such an environment will lead Apple and Google to more broadly cut their app store commissions to keep developers loyal.
As a result, it's plausible that something like 2% to 4% of Apple's revenue winds up being impacted by App Store policy changes. But as mentioned before, a lot remains unknown about what developers, regulators, courts and Apple itself will do.
5. Markets Have a History of Overreacting to Legal Rulings
Remember Apple's big patent win over Samsung in 2012? Samsung and to a lesser extent Google's shares tanked on the news, as markets feared the worst about what the ruling would mean for future Android device sales. But by the time Apple and Samsung buried the hatchet in 2018, such fears were a distant memory.
Likewise, there have been many occasions where the shares of a patent troll (er, IP licensing entity) have soared thanks to a legal win against Apple or another tech giant...only to come back to earth as the fight continued dragging out in the courts.
The lesson: Legal rulings involving tech companies have frequently sparked knee-jerk reactions from equity markets that wound up looking pretty excessive over time. This may or may not ultimately prove the case for the moves seen on Friday in the shares of Apple and various app developers, but it's worth keeping in mind -- particularly since Rogers' decision wasn't the kind of unequivocal defeat for Apple that some initial stories made it out to be.
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