‘Long term, Apple is going to lose the App Store war’

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.

34 Comments

  1. Gregg Thurman said:
    Two things:

    Wishful thinking, and

    It would appear that Peers’ brain has been termite infested for some time.

    10
    September 11, 2021
  2. Timothy Smith said:
    Can someone explain the meaning of this sentence?
    “When coupled with Apple’s incipient antitrust violations, these anti-steering provisions are anticompetitive and a nationwide remedy to eliminate those provisions is warranted.”
    Specifically, what is an “incipient antitrust violation”?
    And, why does California law apply nationwide?

    4
    September 11, 2021
    • Gregg Thurman said:
      Saying it is so, doesn’t make it so.

      It’s a cheap journalist trick to state something as fact, that is either false or has not been proven. But it sure does stir up the haters, and has the intended consequence of increasing reader eyeballs.

      8
      September 11, 2021
    • Jerry Doyle said:
      @Timothy Smith: “…. And, why does California law apply nationwide?”

      Timothy, I suspect that this will be one of the court’s decisions Apple will use on appeal. What happens in California should stay in California.

      3
      September 11, 2021
      • Robert Stack said:
        @Timothy: The short answer to your Q is that obviously Apple cannot have two different versions of iOS, one for California and one for the rest of the US. In the same way that it is simply not practical for car manufacturers to produce two versions of the same motor vehicle with differing emissions standards for the US market, one for CA and one for the rest of the US.

        @Jerry: “What happens in California should stay in California.”

        I went back and forth on whether to respond to this particular statement. I’m hoping that your intent was not to invoke one of those tired old “Let’s bash California” cliches because of one particular law that you may not personally agree with. In contrast to most of what you post here, these kind of statements are neither helpful nor constructive. Let’s not forget California is Apple’s home, and they are quite proud of it, from the “Designed in California” that appears on their products to the naming of their MacOSes. These California ideas – taken globally – seem to have made you a millionaire and enable you (and many others) to live your life the way you please. If what happens in California should stay in California, perhaps you should write to your governor and tell him to stop trying to convince California businesses to relocate to Texas.

        0
        September 11, 2021
        • David Emery said:
          Robert, I don’t disagree with your analysis of what Apple would do. BUT the judge herself ruled on the general applicability of the California law.

          “Here, neither the conduct at issue, nor its effects, are taking place “wholly outside” of California. Apple is headquartered in California; the DPLA is governed by California law; and the commerce affected by the conduct that the Court has found to be unfair takes place at least in part in California. Accordingly, Apple has not shown that Healy prevents the Court from enjoining conduct outside of California that undisputedly harms California and its residents. See RLH Indus., Inc. v. SBC Commc’ns, Inc., 133 Cal. App. 4th 1277, 1291–93 (2005) (holding that “the commerce clause, even as construed in Healy, does not necessarily prohibit state antitrust and unfair competition law from reaching out-of-state anticompetitive practices injuring state residents”).” https://s3.documentcloud.org/documents/21060647/epic-v-apple-bench-trial-order.pdf pg 167

          0
          September 11, 2021
          • Robert Stack said:
            Thx for that clarification David!

            So its not even legally possible – assuming her decision is not overturned on appeal – for this decision to “stay in California.”

            0
            September 11, 2021
  3. bas flik said:
    the author does not really understands economics. why people spending more on ios than on android? people want to spend with apple not with one vague developer from china or Epic. Apple made Epic, not Epic. without apple payment system all these devolopers of games would never have existed.

    7
    September 11, 2021
    • Gregg Thurman said:
      Apple made Epic, not Epic. without apple payment system all these devolopers of games would never have existed.

      Tah Dahh. Before the iPhone there was no App market.

      7
      September 11, 2021
  4. Romeo A Esparrago Jr said:
    Apple has pest control.

    11
    September 11, 2021
  5. bas flik said:
    how much money these developers made on the Nokia ecosystem or the smartphone ecosystem of microsoft.?

    developers can introduce their own paymentsystems but no one will use them. people do not want to pay to developers. they only trust apple. thats the strenght of the appstore. developers overestimate themselves.

    4
    September 11, 2021
    • Gregg Thurman said:
      how much money these developers made on the Nokia ecosystem or the smartphone ecosystem of microsoft.?

      You can add the ecosystem for RIMM’s Blackberry to that list.

      Prior to the iPhone there were 3 primary mobile OSs, those 3 have been completely supplanted by iOS and a poorly constructed copy of iOS.

      5
      September 11, 2021
    • David Drinkwater said:
      Don’t forget CrackBerry! Apps made a killing there in 2005. \s

      The App Store for BlackBerry looks like a high school project.

      1
      September 11, 2021
  6. David Humphrey said:
    I would not consider myself a gamer, but I do play games, and buy in game enhancements. However I am only willing to make these purchases in the App Store through Apple. I do not want my payment or payment information routed through a game developer in Russia or China or a prince on the African continent.

    6
    September 11, 2021
    • Bart Yee said:
      Exactly! All it will take is one hack of any game developer or associated third party payment system, especially if there’s identity theft, unauthorized transactions, young adult bank account or credit card drainage or other malicious consequences, and the whole security and privacy risks of alternative payment systems will come to the forefront.

      Just as app tracking issues are heavily voted in Apple’s favor because they distrust others, so may be the same response for alt payment systems.

      Apple has a proven track record on payment safety and very low friction, the alt payment systems and app developers ability to maintain security has yet to be proven. And what’s to stop Epic and other developers from making some additional money on the side with selling transaction or account activity data, even anonymized, for as or other interested parties? They want the transaction money, what will stop them from monetizing it further?

      1
      September 12, 2021
  7. Gary Morton said:
    The headline should read: Long term, Apple is Going to Lose the App Store Battle, but Win the War. Analysts and pundits opining on the Epic ruling and the potential machinations of the three grandstanding stooges in DC (Blumenthal, Blackburn, and Klobuchar), should think deeper and more comprehensively about the situation. Apple has about a billion users on the app store. Right now the primary method of monetizing these billion users is to charge a small fee for paid apps and for in app purchases. How else might Apple monetize these billion users? I am sure those familiar with answering such questions, as well as the very smart team at Apple, have some brilliant answers. In the long run, this whole period of scrutiny on the App Store commissions will probably be one of the best things to happen for the Store’s profitability.

    5
    September 11, 2021
  8. Fred Stein said:
    Apple is built with glass and steel not wood.

    11
    September 11, 2021
  9. Duane Bemister said:
    Silver lining could be no more free apps. Minimum $5.00

    1
    September 11, 2021
  10. Jerry Doyle said:
    This is a “click bait” article targeted to grab readers attention in the absence of presenting deep analysis and understanding of the ramifications of the court’s decree.

    “…. And yet, judging by the 3.3% drop in Apple shares today, investors aren’t overly concerned.” — Correct, there is no panic for there needs to be none for investors who do understand fully the consequences of the court’s ruling. In fact, much of that 3.3% drop in stock price had more to do with the markets’ concern over inflation. Notice how much red permeated the entire markets yesterday. Candidly, in the absence of the inflationary concerns yesterday in the markets, I suspect Apple’s stock price decline would have been about half of the 3.3%, or 1.65%.

    “…. Apple may have won much of the Epic battle. Long term, though, it’s going to lose the app store war.” — Apple will win the App Store war because a reason exists for users of the iOS system: the Wall Garden of Zen. Users on the iOS platform are there not only because of the high performance level it affords, but because of the security and privacy those Walls provide while users scurry everywhere across that platform using it fully in the absence of worrying about lost privacy, security, while gaining protection from potential fraud and abuse that comes from venturing off to third party sites.

    “…. that competitors from related submarkets are making inroads into the mobile gaming submarket, …”. As it should be. That is the purpose of competition and I suspect competitors in sub markets will continue making increasing inroads into the mobile gaming market thus diminishing mounting pressure regulators have been using against Apple as holding monopoly power. Apple does not strive to be a monopolist. Apple strives to provide a premium experience. This high quality level will limit market share alone, thus mitigating the calls “Apple is a monopolist.”

    Martin Peers has written a news article that comes across as a “sore loser” instead of a columnist reporting on the merits of the court ruling for the parties involved. I can feel Peers seething over Apple’s triumph of close to a total clean sweep in its battle with Epic.

    4
    September 11, 2021
  11. Mordechai Beizer said:
    I read this somewhere else and I think it’s a good idea. Rather than hosting Epic and such for “free” Apple should start charging distribution/download fees. Maintaining the App Store software distribution capability can’t be inexpensive. Stop the free ride. Apple could exempt small developers and for large developers it could provide download credits proportionate to the revenues Apple collects from those developers.

    2
    September 11, 2021
  12. David Emery said:
    It’s interesting to ponder the consequences if Apple is declared an ‘monopoly’. What would be the scope of that declaration? The App Store? iOS on the iPhone? All iOS devices? And then what would be the new rules for Apple’s operations? I don’t know if there’s a precedent for this.

    0
    September 11, 2021
  13. David Drinkwater said:
    I don’t know that Gonzalez Rodgers’ math is correct about the 70% GM, but let’s assume that drops to 50% or a ridiculously unlikely 40%. Then let’s assume a probably very modest CAGR. Then I apply a Goal Seek to keep profit level with “today”.

    In 5 years, Apple will have to achieve an 11% CAGR on the App Store to remain level with its current Profit Value if GM drops to 40%.

    In 5 years, Apple will have to achieve a 7% CAGR on the App Store to remain level with its current Profit Value if GM drops to 50%.

    “Long Term” Apple will be fine.

    Also, if Apple’s GM on the App Store is 70%, then that means that Apple’s cost to run the Store is 30% of the 30% in App Store sales, or 9% of App Store sales, so Apple is investing far more in the App Store than any of its individual “Business Partners”. ‘Cause you know those business partners are also making a profit over their “measly” 70% of sales!

    Apple is providing a service of significant value to its business partners. Even the ingrates like Epic.

    2
    September 11, 2021
  14. Epic’s CEO is crying in his soup for a reason. He just lost a huge and expensive case.
    This case cost Epic far more than it must pay Apple. Legal fees. Lost Fortnite gaming revenue. Senior management time away from running the business. A relationship with a major mobile gaming platform, iOS. Epic is essentially cornered into paying counsel to craft an appeal or at least spend many billable hours to determine if an appeal is worth more of the above. Old cats rarely chase their tails.
    Apple incurred the same costs and may lose what most firms consider serious money. I love star maps as Venn diagrams. The circle for the potential Epic case impact on Apple revenue looks like the Earth, next to Jupiter. Privately held Epic, on the other hand, is worth far less than a trillion. The cost to Epic looks more like the Moon beside Earth but only time will tell.
    Developers need to work fast and furiously to implement the new secure link/button to allow payment other than Apple Pay. No matter where they get the code App Store reviewers are looking closely at Epic submissions after their deception. Fortnite Korea is not happening until mandated. It is safe to say Epic is no longer on good terms with Apple, a major platform. That relationship will need mending all over the world.
    Apple is about to release major iOS updates, possibly with new payment-related features. My face authorizes purchases on my phone, when it works. Kids into gaming will still be spending their parent’s money. My friends control their kid’s phone purchases, often by paying for ½ of Apple gift cards the kids load on their phones. They wash dishes, cut the neighbor’s lawn, babysit or invest on Robinhood for the other half of the gift card. These kids can’t own Epic shares but some of them do own Apple shares, Gamestop, AMC, bitcoin fragments or fractional shares. They also outgrew the Fortnite metaverse. Some are starting to date in the real world. Dating is more fun than any metaverse for sure! At that age they don’t even need a Tinder-like app to find a compatible friend.
    So far as I can read into it, the Apple/Sony/Nintendo/Microsoft/Android 30% revenue cut still stands, even after December. The 30% cut may apply to fewer apps but the App Store aggregate is growing dynamically. The actual hit to Apple revenue may be impossible to find 6 months or a year from now, when it should be evident somewhere other than Epic’s bottom line.

    9
    September 11, 2021
  15. John Konopka said:
    Let’s say Apple has to allow some sort of blurb in the app’s description that you can pay elsewhere. If it is a tiny bit easier to pay through Apple that’s what most will do.

    1
    September 11, 2021
  16. Rodney Avilla said:
    1 of 9 termites got thru. And the court’s ruling will make it harder for the other 8. At first I thought he is just a pessimist. But I believe in reality he’s simply miscalculating the effect this ruling will have on apple’s ability to make significant long term profits from the App Store.

    1
    September 11, 2021

Leave a Reply