Katy Huberty: Those Apple App Store headlines are more bark than bite

The economic impact of the latest changes is negligible, says Huberty. “Just 1-2% of EPS, at worst.”

From a note to Morgan Stanley customers that landed on my desktop Wednesday:

There have been a number of App Store headlines/updates in the last 10 days, including: 1) 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), 2) 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, 3) the launch of an anti-trust case against Apple (over in-app payments) at the Competition Commission of India, and 4) 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.

But 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 (1). 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 (2). 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 (3). In other words, we believe the recent App Store headlines are more attention grabbing than the ultimate financial impact to Apple’s revenue or profitability.

Maintains Overweight rating and $168 price target. 

My take: You’re going to like Huberty’s bull case:

apple huberty app store bark

Click to enlarge.

20 Comments

  1. David Emery said:
    $200 on April 1? I’m OK with that 🙂

    1
    September 8, 2021
  2. Fred Stein said:
    Katy will likely nudge her base case a up few percent soon enough.

    And I heart Katy.

    2
    September 8, 2021
  3. Gary Morton said:
    How many feel more secure with a payment to Apple vs. some of the app vendors? Many of those looking to save every penny were probably already going to the developer sites. Apple could put more marketing effort into emphasizing the benefits of paying through Apple and more effort into making that decision more beneficial to the customer—frequent buyer, etc.

    10
    September 8, 2021
    • David Emery said:
      That’s an excellent point. A lot of software I use, some apps and websites, clearly were done by “the lowest bidder.” Like the call for “7 years of support,” this is something that Apple can use as a strength. It’s not perfect, but Apple’s software QA is A Lot Better than industry average. Eventually legislatures will catch up and start making software vendors liable for flaws in their products (eliminating shrink-wrap disclaimers.) Software vendors with the best QA will come out ahead of the pack.

      2
      September 8, 2021
    • Kirk DeBernardi said:
      @ Gary Morton —

      I think that your suspicions will out on this — and to a point that will ultimately surprise many given all of the proposals so many others banter about “correcting” the App Store problem that isn’t.

      I mentioned in an earlier comment about this subject that it’s probably only the big whales in the kingdom-of-apps that burn for coveting their own cash registers and costly backend that Apple has always delivered to ALL app developers big and small with their (since creation) store parameters — adjusted awhile back favorably to the smaller developer, I might point out.

      Add to that the bulk of us who happily enjoy the security, convenience and performance of all this exchanged through Apple’s walled-garden gates. I don’t like using the “walled garden” term, but is that not what we all enjoy most about the garden?

      From my vantage point, there are no walls but moreover a strong desire to be in a well-kept and pleasurable garden.

      Sorry Apple happens to be the best gardener.

      5
      September 8, 2021
      • Fred Stein said:
        Upvoted and wish to add. The biggest whale, Epic, wants unfettered access to children (and young adults) to sell in-App stuff, which can be addictive.

        4
        September 8, 2021
    • Dan Scropos said:
      Great point, Gary. However, people still run debit cards and get no rewards, as this title from yesterday points out—“ 7 Years Later, Only 6% Of People With iPhones In The U.S. Use Apple Pay In-Store When They Can”

      Of course, people are also using other forms of payment, probably with equal or better rewards than Apple, but Apple must raise those adoptions numbers from the 6% referenced above. That seems like a heck of a missed opportunity, at least so far.

      2
      September 8, 2021
      • Kirk DeBernardi said:
        @ Dan Scropos —

        You might be misconstruing the use of Apple Pay (no regular rewards) with the acquisition and use of the Apple Card (regular rewards). Apple Pay is part of the iOS. The Apple Card has to be requested.

        That survey was about Apple Pay where you can activate any credit/debit card, or even Apple’s own Cash card and Apple Card.

        Also, I would to challenge the survey results of only 6% using Apple Pay. Somethings off. Really off if you wear an  WATCH.

        This is all a fine example of something being overtly convenient that people are overtly slow to pick up. Go figure. I’ve gone a long time without much cash in my wallet and virtually zero coin.

        Isn’t that a better and safer way to go?

        1
        September 8, 2021
        • Kirk DeBernardi said:
          Also @ Dan Scropos —

          Oddly, PED seems to have taken that original survey post down.

          I propose challenging it because, if my memory serves me well, Neil Cybart had a much stronger number at one point in time.

          0
          September 8, 2021
          • Dan Scropos said:
            Full disclosure—This is copy and pasted from a Seeking Alpha article:

            At launch, card networks and large issuers were teed up. So, too, were a handful of large merchants that already had contactless at the point of sale, waiting for consumers to waive their iPhone 6s and 6Ss across them at checkout. In the U.S., those merchants were pioneers, as only a few in the country had activated contactless at the POS at that time.

            Seven years post-launch, new PYMNTS data shows that 93.9% of consumers with Apple Pay activated on their iPhones do not use it in-store to pay for purchases.

            That means only 6.1% do.

            That finding is based on PYMNTS’ national study of 3,671 U.S. consumers conducted between Aug. 3-10, 2021.

            After seven years, Apple Pay’s adoption and usage isn’t much larger than it was 2015 (5.1%), a year after its launch, and is the same as it was in 2019, the last full year before the pandemic.

            0
            September 8, 2021
            • Kirk DeBernardi said:
              @ Dan Scropos —

              Thanks for that copy & paste, Dan.

              I wish I could recount what Neil Cybart’s numbers were, but I’m at a loss. I also remember that at the onset of Apple Pay, the adoption numbers were indeed at a crawl because of the hardware not being sufficiently proliferate. Today, however, things are different.

              At first blush, with steady and strong growth of Apple Watch sales coupled with the instant magical delight of paying with a device on your wrist, I can’t imagine people aren’t taking full advantage of this or would defer to any other method of payment once they experience this. The phone device payment moment is great, but the watch payment moment trumps everything else.

              The as-of-today 6% number, if true, almost suggests a failed process, but given this delightful phenom of wrist payment, the weak 6% declared in the article just seems amiss — big time.

              In closing, I can’t tell you how many times I’ve experienced clerks at the register comment with glee about seeing a payment made from the at-the-ready wrist.

              Bada-BING.

              0
              September 9, 2021
              • Bob Goldstein said:
                I don’t know about checkout glee but for me paying with my watch is the killer app for the Apple Watch. I could not live without it. It is so much easier than paying with the iPhone

                0
                September 9, 2021
        • Gregg Thurman said:
          and virtually zero coin.

          I carry necessary cards and currency in a money clip, and always round up so I don’t have to carry change.

          0
          September 8, 2021
  4. bas flik said:
    will be again split introduction. 17-9 starts selling of 13 and 13 pro. 3 weeks later 13 mini and 13 pro max. carriers we have spoken to expects more sales than last year based on more deferments.

    5
    September 8, 2021
    • Gregg Thurman said:
      Rats. Unless I’m really lucky when I place my order for a 13 Pro Max, I won’t get it until November. Oh well, November is my birth month.

      0
      September 8, 2021
    • Bart Yee said:
      @bas Thank you for that information. It’s great to have our own “European Correspondent” insider (with a nod to Road & Track) with real time info.

      0
      September 8, 2021
    • Bart Yee said:
      This also means the big generator iPhone 13 Pro Max’s revenue will all be in Q1 2022. This Will cause ASP’s to climb that quarter.

      Also, if carriers expect more sales due to “deferments” or payment contracts, I think we can expect aggressive carrier promotions to drive iPhone sales. Strongly hinting a huge Apple quarter, Android, eh, not so much.

      0
      September 8, 2021
  5. Dave Ryder said:
    The big money seems to be in games. And Apple has invested a lot to make iOS devices powerful game consoles. Thus, perhaps should charge a different fee to Apps that leverage those “high-performance” features.

    0
    September 8, 2021
  6. Gregg Thurman said:
    The Fed’s Beige Book has been released and, initially, it appears that the Street likes it.

    2
    September 8, 2021
  7. Bart Yee said:
    I ❤️ what Huberty does in examining the “what if” cases with a realistic data driven analysis. She is a cut above the rest.

    4
    September 8, 2021

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