The Information’s Martin Peers compares the effect yesterday’s Epic ruling to what happens to your home after a busload of termites move in.
From Peers’ “The Briefing” ($) mailed Friday to The Information subscribers:
Today’s court ruling on Epic v. Apple is the kind of decision that seems to have something for everyone, even the news media (a big story on a Friday—yippee!). Apple won on most counts, including one of its counterclaims against Epic. But Epic prevailed on a key count: Judge Yvonne Gonzalez Rogers ruled that Apple’s policy preventing app developers from steering users to alternative payment options is anticompetitive. As wonky as that sounds, the implications for the App Store are similar to what would happen to your home if a busload of termites showed up out front. It might take a while but eventually the house would crumble.
And this is no modest home. Apple’s operating profit margin on the App Store is more than 70%, the judge found in her ruling (she described the margins as “extraordinarily high,” just to be clear). Based on estimates cited by a congressional investigation that Apple’s App Store annual revenue last year was around $17 billion, its operating profit would have been around $12 billion, or nearly 20% of Apple’s total. That’s the pile of money now at risk. And yet, judging by the 3.3% drop in Apple shares today, investors aren’t overly concerned.
That may be true in the short term. But you have to be wearing rose-colored augmented reality glasses to not recognize that the ruling is one of many reasons why the App Store’s phenomenal profit margins will decline meaningfully over the long term. For one thing, game developers should be able to figure out technological fixes to reduce the friction for gamers using alternative payment options. Then there is the pressure of app store investigations in Europe and the U.S. and legislation to loosen App Store rules such as we’ve already seen in South Korea and which are pending in the U.S. It’s simply not believable that Apple will be able to escape unscathed. And with profit margins of 70%, losing even $5 billion in App Store revenue will have an impact on Apple’s bottom line. Apple may have won much of the Epic battle. Long term, though, it’s going to lose the app store war.
As for the ruling that isn’t a monopoly, which might help Apple fend off the federal government, Peers says “not so fast.”
On page 139, the judge says that “the evidence does suggest that Apple is near the precipice of substantial market power, or monopoly power, with its considerable market share. Apple is only saved by the fact that its share is not higher, that competitors from related submarkets are making inroads into the mobile gaming submarket, and, perhaps, because plaintiff [Epic] did not focus on this topic.”
Ouch. In other words, a more focused look at Apple’s monopoly power could yield a different answer.
My take: Good thing Apple’s business model is not built on the foundation of a termite-ridden App Store.