Apple's Big Problem
The Apple App Store is a monopoly....or not?
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Let’s rewind the clocks.
In 1984 Apple released one of the most iconic commercials ever made in preparation for its Apple Macintosh personal computer release. As you will see below, the commercial is an allusion to the George Orwell novel 1984 in which “Big Brother” controls every aspect of the citizens’ lives. In the commercial, the assumption is Apple’s product will break through the mold and set people free.
**RECORD SCRATCH**
Fast forward to last year and Fortnite (the ultra-popular video game created by Epic Games) is banned from the Apple App store on the basis that they were using in-app currency that went against Apple’s guidelines.
In response, Fortnite clapped back with an “epic” response…
Epic Games has had a rough relationship with Apple and their App Store. Apple completely removed Epic Game’s popular game Fortnite from the App Store. It is said that Apple made this decision after Epic Games offered a discount for purchasing its in-game virtual currency outside of the Appstore. In response, Epic Games filed a civil lawsuit against Apple claiming that “Apple has a monopoly in the form of the iPhone, the iOS ecosystem, and the App Store that binds them together…” This legal battle continues to go on and Epic Games was denied a request for a preliminary injunction that would have allowed Fornite back onto the App Store.
TL,DR: Epic games was tired of getting the short end of the stick and forking over insane amounts of money to Apple. To get around this, Epic games implemented an in-game currency in their app Fortnight which circumvented this. Apple got mad and unplugged Fortnite.
Not going to lie, Fortnite is a legend for throwing up this on their socials.
What is the issue?
Before facing backlash from both large and small app developers, Apple was collecting a 30% commission on in-app and app purchases. In addition to collecting a whopping 30% cut from all app and in purchase sales, Apple has been accused of forcing users to pay through their payment system.
Apple collects a 30% commission, who cares?
You might be thinking to yourself “so what if Apple collects 30% commission and forces users to make in-app purchases through their platform?” Well, it goes beyond that.
To take it a step further, Apple has been accused of “excluding or suppressing apps that compete with their own products”. Due to Apple’s suppression of freedom on their app store and the lack of competition besides Google’s Google Play store, many app developers and members of Congress have accused Apple of operating their App Store in the manner of a monopoly.
Who has spoken out against this issue?
Big companies such as Spotify, Tile, and Epic Games (mentioned earlier) have taken a stand and accused Apple and Google of “charging exorbitant fees and copying their ideas” as well as preventing users from making purchases via alternative methods (not through the App Store’s platform).
When considering Spotify, it is apparent that they have been aware of Apple’s mastermind plan for a good bit of time. Think about it, what happens when you go to purchase a Spotify subscription? You are instantly sent outside of the app to complete your purchase on their website.
Apple’s Response
Apple described this whole stand against their App Store as a “sham settlement designed to appease courts, regulators, and lawmakers”. Another unnamed executive said that is was a “concession” to allow app developers to tell customers about alternative payment methods. Apple also made the claim that having 55% of the market share wasn’t enough to classify them as a monopoly.
In a nutshell, here are the steps Apple has taken to ease the pressure it is receiving:
Created a 100 million dollar fund to pay app developers
Agreed to publish an annual report on the number of apps it removes/rejects from the app store for more transparency
Reduce commission taken from small app developers from 30% to 15% for at least 3 years
Allow news organizations to pay 15% commission on subscriptions sold if news organization agrees to participate in Apple News.
Taking a look at Apple’s response, it seems like they aren’t very sincere about the issue and that they are only acting to please app developers and to avoid future lawsuits. Apple has essentially put a time constraint on how long they will reduce commissions for. They also demonstrate their controlling nature by forcing news organizations to participate in their news platform to receive the reduced commission.
It seems that Apple looks to make these fixes to please app developers and lawmakers in the short-term, but may revert back to operating their App Store their previous ways when the backlash has settled.
What’s next? Regulation?
As lawmakers start to realize the anti-competitive nature of the App Store and the unwillingness to change on Apple’s end, Uncle Sam may step in and impose some regulations of their own. This could involve the creation of new laws for Apple alongside other big tech. At this time, lawmakers are just starting to open their eyes on the issue and even have begun to try and take action.
Do we know for sure that Apple will face regulations towards its App Store? We don’t know for sure, but with eyes opening and the growing support of app developers and lawmakers to take action, it is a high possibility.
My Take
As most of you know Apple is my second biggest position. It would be foolish for me to not consider this as an upcoming problem. As I always say, never fall in love with a stock. A quick way to approach this is knowing that Apple’s revenue in 2020 was $274.3 billion and their app store revenue for that same year was 72.3 billion. So that’s a decision/problem that is affecting 26% of Apple’s revenue. Now, what you have to think about is let’s say regulation steps in making Apple drop their 30% commission to 25% and Apple stock drops 15% because the market freaks out. Was the 15% drop in market cap ($357 BILLION in market cap) worth it? More than likely not. For me, that would be a glorious buying opportunity. So in my opinion, if regulation does step in and the market reacts - do the math of the relationship between the drop in market cap vs. the loss in-app store revenue and that will give you a good indication if it is a buying opportunity or not.
As aways I know nothing, this is all opinions, long Apple 😊
Have a great weekend!
I know I put this at the bottom of a lot of my emails… but if you just share this with a friend that is curious that would mean the world to me!
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