Katy Huberty on Epic vs. Apple

“Very few of the 30M+ app developers can afford to introduce friction to customer acquisition and payments”

From a note to Morgan Stanley clients that landed on my desktop Monday:

Why this matters: If it were to take effect, this ruling would allow app developers to offer users a range of lower-fee payment options for in-app purchases, beyond Apple Pay (which carries a 30% fee). We believe it would be possible for users to access alternate channels without leaving the app (e.g. via an in-app browser), resulting in a relatively low friction experience to either directly input credit card details or link to third-party payment accounts (like PayPal). However, this would require consumers to manage disparate accounts across many developers, creating more friction than the current App Store model. Based on recent commentary from Epic, we currently assume that AAPL will not allow developers to offer financial incentives (like discounts) for users to switch to direct payment methods, but this remains open to interpretation.

Apple Key Takeaways: Very few of the 30M+ app developers can afford to introduce friction to customer acquisition and payments, nor do they have the brand, credibility and marketing budget to drive consumers direct to their websites or other in-app direct payment platforms. At the same time, consumer purchasing habits are difficult to change and few consumers have the ability to manage multiple direct accounts and payment platforms. As such, we believe the right way to frame downside risk to AAPL (and Google Play) is by looking at revenue and profit exposure to the largest developers globally (Exhibit 2). While the changes implied by the US District Court ruling only technically apply to the US, Apple set a precedent recently when it announced changes to ‘reader’ apps are applied globally, and we therefore run earnings risk on a global basis. Net, if AAPL were to lose all revenue from the top 20 app developers globally, it equates to 2% of revenue and 5% of EPS in a worst case scenario. Using the Tinder experience of 40% direct payment adoption noted by our US Internet Research colleagues on even the top 100 developers equates to a slightly lower revenue (<2%) and EPS (<4%) risk.

Maintains Overweight rating and $168 price target.

Cue Exhibit 1:

apple epic katy huberty

My take: Would the court require Apple to host buttons that open alternative payment channels via in-app web browsers, as Huberty suggests? To be litigated, I presume.

12 Comments

  1. Miguel Ancira said:
    I know this is a politics-free blog, but we cannot be blind to the fact that the last four years have created a division in this country by merely dragging the other side down, as opposed to offering a better option.

    This has now creeped into the business arena.

    If you have a better option, then create your own ecosystem, your own app store, your own hardware….etc.

    Good luck with security on that if you ever do.

    2
    September 13, 2021
  2. Kirk DeBernardi said:
    As I commented to a post here yesterday —

    “Puzzled as to how Apple will engineer the UI for handing off payments to an outside site?

    An itsy-bitsy-teeny-tiny button buried on the eighth page of the software license agreement legalese?

    (After all, Apple’s been known to be clever.)

    😉 “

    While made tongue-in-cheek, in this void of any court-blessed express definition of how Apple needs to implement this, it’s apparently anyone’s guess as to how they’ll engineer the UI to allow for this outside action to satisfy the spirit of the injunction.

    That alone could end up being fought in court. Maybe we should keep the popcorn poppers popping for this page-turner.

    1
    September 13, 2021
    • Kirk DeBernardi said:
      Also —

      As Katy proposes here, it’s comforting that invariably almost everyone is mentioning that “people won’t change their ways” or “people don’t like added friction” as a consensus speculation about how this is REALLY going to pan out when implemented.

      Add to that the simple fact that people seem to enjoy Apple and it’s ways.

      4
      September 13, 2021
    • Steven Philips said:
      I think they’d be wise to be very open.

      1
      September 13, 2021
  3. Gregg Thurman said:
    As I thought Friday, when I bought on the dip, cooler heads (not agenda driven media airheads) will offer up rational analysis of what just happened, and unsurprisingly that analysis will be supportive of opinions first expressed here.

    2
    September 13, 2021
  4. Gregg Thurman said:
    Slightly OT, but at 12:09 PM EST, with AAPL trading at $149.53, someone bought 3,000,000 shares of AAPL.

    I’ll wager it was Toni, doing one thing and saying the other.

    3
    September 13, 2021
  5. Fred Stein said:
    Katy and Gene Munster say the same thing, essentially.

    Katy’s $168 PT includes the EPS hit. And, she has an actual DCF.

    3
    September 13, 2021
  6. Fred Stein said:
    @Kirk and Joe: Spot on indeed. And supercool that Judge Rogers made this point as well.

    2
    September 13, 2021
  7. Jerry Doyle said:
    “…. My take: Would the court require Apple to host buttons that open alternative payment channels via in-app web browsers, as Huberty suggests?”

    I just hope that Apple places appropriately at that juncture where users who decide to leave the iOS platform to an alternative payment channel a noticeable caveat such as: “Selecting an alternative payment channel voids Apple’s responsibility relative to security of payment system and involvement in dispute resolution matters.”

    5
    September 13, 2021
  8. Greg Lippert said:
    I did not see that the link would allow opening of alternative browsers. I believe it can open a webpage (in users browser of choice). Not in app.

    Katy says what I said in another post. Most companies cannot afford to build and maintain a buying platform or handle the security. Most users will choose Apple over third party for privacy and convenience – on a small purchase how much do they save, a few nickels?

    A handful of companies will get around the App Store and potentially save some money – but how much – if they discount price and still have to pay credit card fees and maintain a store and security? Wait til one has a security breach.

    A company like Epic might be able to build a successful alt payment system for many dev’s where users can have a single sign in or can buy credit similar to the App store, where dev’s only pay 15%. However how low can they go? If Apple matches them they lose their price advantage.

    2
    September 14, 2021

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