Trading On margin

Epic Games court ruling is unlikely to seriously harm Apple’s service business

Apple Inc. CEO Tim Cook, center, arrives at U.S. District Court in Oakland, Calif. On Friday, May 21, 2021.

Nina Riggio | Bloomberg | Getty Images

Apple won nine of 10 counts in its lawsuit against Epic Games on Friday, but federal judge Yvonne Gonzalez Rogers issued an injunction prohibiting Apple from preventing developers from logging into their apps to directly collect payments and remove Apple and its 30% catch. in-app purchases.

Apple stock slipped more than 3% on Friday’s news. But Wall Street analysts and longtime Apple followers believe the financial impact on the company will be limited.

Developers will only be able to link and won’t be allowed to create their own alternative payment mechanism in their apps, a person familiar with Apple’s thinking said. This limits the effect, as Apple’s in-app payments will always be easier for a consumer than placing their credit card on a website.

JPMorgan analyst Samik Chatterjee said the decision does not change the bank’s outlook for Apple’s services or app stores, noting that the decision does not recommend changing the 30% hold. ‘Apple and that it was only launching the first step of a multi-step process.

“Our view continues to be that consumers will take advantage of payment alternatives in the case of expensive subscriptions and in-app purchases, limiting the headwinds for App Store revenue and revenue from what is. otherwise a very large application base, ”Chatterjee wrote.

Gene Munster, longtime Apple founder and analyst at Loup Ventures CNBC’s Josh Lipton told that a worst-case scenario for Apple could cut Apple’s profits by 4% over the next year, but more likely the effect would be closer to a 1% drop.

“The two positives for investors: First, 12 to 18 months after the changes are implemented, growth rates will return to normal,” Munster said. tweeted. “Second, Apple’s long-term potential is unaffected by the change.”

Apple considers the verdict a victory because it did not challenge Apple’s right to determine what software is licensed on its store, and because it did not find Apple to be a monopoly under federal or state law.

“We are very satisfied with the court’s decision and consider this to be a huge victory for Apple,” Kate Adams, general counsel for Apple, said in a statement.

But investors are keeping a close watch on Apple’s service business, which has grown sharply in recent years, and includes Apple’s App Store sales revenue in addition to online subscriptions, search license revenue from Google and AppleCare guarantees.

Services represent around 20% of Apple’s revenue, but it’s a profit driver for Apple, with significantly higher margins than its hardware business. Apple reported $ 53.77 billion in service sales in its fiscal 2020 with a gross margin of 66%, well above the 31.5% margin for Apple’s hardware business.

Apple does not detail the share of its service sales coming from the App Store, but it is an important part. Apple’s App Store grossed more than $ 64 billion in 2020, according to CNBC analysis. Sensor Tower, an app analytics company, places the figure slightly higher at $ 72 billion.

Globally, Apple grossed $ 47.6 billion in mobile games, collecting fees of around $ 14.3 billion, according to Sensor Tower statistics provided to CNBC.

The judge’s ruling on Friday underscored how much of Apple’s App Store revenue comes from games and especially big spenders. Rogers said in Friday’s decision that it believes Apple’s fully encumbered margin on the App Store to be over 72%, based on Apple documents.

Shares of gaming apps soared on Friday’s news. Shares of AppLovin, Zynga, Playtika and Roblox have climbed on hopes that these game companies can cut costs by directing users to their own payments, bypassing Apple’s cut.

Epic Games is privately held and its CEO Tim Sweeney said in a statement that Friday’s decision was not a victory. Epic wants to be allowed to offer its own app store on iPhones.



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