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.
Wishful thinking, and
It would appear that Peers’ brain has been termite infested for some time.
“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?
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.
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.
@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.
“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
So its not even legally possible – assuming her decision is not overturned on appeal – for this decision to “stay in California.”
Tah Dahh. Before the iPhone there was no App market.
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.
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.
The App Store for BlackBerry looks like a high school project.
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?
“…. 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.
She’s wrong. One of the clear results of the existence of a viable alternative to iOS is that what one competitor does the other emulates. That is what was missing when Microsoft ruled the roost. Thus competition, and the benefits to consumers thereof, is alive and well in the portable digital device market. (The only possible exception is collusion, which is not a serious suggestion between these two fierce competitors.)
This comment also flies in the face of her earlier comment that “Success is not illegal.”
OT, but had to share this comment by someone called Dave on a board I lurk at.
“So I’d like to share some information with Apple investors.Lets just say “a little birdie told me”Apple charges $99 annually to allow a developer to place their app on the app store.This number applies to all apps no matter the amount generated through it.That fee structure is going to change soon.No final date has been set,but people close to the matter believe by EOY.For all developers the fee to publish the app will double $199 per year.If the developer chooses to add a link to alternate payment systems,then every time that link is accessed a $1.99 cent fee will be levied by apple to the developers account that must be paid annually at time of payment of annual app store fee.The catch for the developer is EVERY TIME THE LINK IS ACCESSED,not on amount generated through it.Apple will always be Apple users first and investors close second,company.Developers chosing to be greedy and change the rules that all others have followed then Apple will adapt also.”
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.
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.
What a load of FUD. This is not an all or nothing “war”. Martin Peer writes like the App store will inevitably stop generating big profits for Apple.
Nonsense.
WORST CASE SCENARIO
With Apple’s profit margin on the App Store at over 70%, if even if Apple took a hit reducing that margin to say 50%, that’s still a helluva fat profit margin for a peripheral part of their business.
MOST LIKELY SCENARIO
Apple will introduce other services in the App store over time that will generate a lot of profit. Namely advertising. Not the obnoxious kind like on Facebook, but related to app rankings and reviews, etc. The app store will evolve.
Not to mention, these doomsday scenarios always ignore the fact that Apple has a very very big and still growing installed base of devices and iOS app users.
FACT: Apple is a lot smarter than business gamers like Epic. Proof: Apple created the App store.