Apple (NASDAQ: AAPL) has bumped into unfair practices claims against the App Store, but Apple stock shouldn’t take too much of a hit.
Earlier this month, Spotify (NYSE: SPOT) filed a complaint with the European Commission alleging that Apple is using non-competitive practices to give preferential treatment to its own apps.
If the EC rules in favor of Spotify, Apple’s app store revenue could take a major hit in Europe. In addition, regulators in the U.S. and elsewhere around the world could start taking a closer look at Apple’s App Store agreements. However, Bank of America analyst Wamsi Mohan says the Spotify accusations are nothing for Apple investors to lose sleep over.
Spotify’s Claims and Apple Stock
According to a blog posting by Spotify CEO Daniel Ek, Apple has not treated Spotify fairly when it comes to offering Spotify’s app in its App Store. Ek claims this unfair treatment has been a deliberate attempt to promote use of Apple’s iTunes and Apple Music over Spotify.
For third-party apps to be allowed in Apple’s App Store, they must agree to Apple’s terms. Spotify singled out three terms in particular that it sees as troublesome.
First, App Store users can only pay for third-party apps via Apple’s own payment platform. Apple takes a 30 percent cut of all purchases made in the App Store. Spotify says this is essentially an unfair tax intended to artificially inflate competitors’ prices.
Second, Apple does not allow third-party apps to access Apple’s hardware services. In other words, iPhone, Home Pod or Apple Watch users can not play Spotify on their devices via Siri.
Finally, Spotify says Apple does not allow free, direct communication between third-party apps and customers. For example, Apple blocks or limits Spotify from emailing certain Apple customers about deals or promotions.
In the past, Spotify has resorted to removing its premium (paid) subscription tier from the App Store to avoid the 30 percent charge. Netflix (NASDAQ: NFLX) and Epic Games are among other apps that have developed ways for customers to bypass Apple’s fees while maintaining their App Store offerings. However, Spotify is now asking the EC to force Apple to change its terms as a matter of free market competition.
Spotify’s Case May Have Merit
Not surprisingly, Apple came out and said there’s no basis for Spotify’s claims. In its response, Apple said it has every right to charge for use of its platform and access to its customers. That access creates tremendous value for Spotify.
Unfortunately for Apple investors, KeyBanc analyst Andy Hargreaves says Spotify’s claims have legal merit.
“We believe Spotify is largely on the right side in both facts and principle, which creates risk that App Store policy terms will be forcibly changed in a way that negatively impacts Services revenue and Apple’s brand,” Hargreaves says.
Hargreaves says if the EC forces Apple to drop or lower its 30 percent revenue take, it could be a drag on Apple Services revenue growth.
With the iPhone market stagnating, Apple’s Services segment is a big part of the Apple bull thesis these days. Hargreaves also said an antitrust ruling could damage Apple’s reputation among its customers. Apple has a loyal following of customers and a reputation for inclusivity and openness, Hargreaves says.
The Good News for Apple Stock
Reputation aside, Bank of America analyst Wamsi Mohan says the whole debate is essentially irrelevant for Apple stock investors. Mohan says Apple’s top 25 most popular App Store apps account for only 8 percent of Apple’s Services revenue. Overall, they account for only about 1 percent of Apple’s total revenue.
“We view this diversification as key to the longer term success of the App Store and view risk from disintermediation as low,” Mohan says.
Mohan also agrees with Apple’s case that third-party developers get plenty of return for their 30 percent fee. Bank of America estimates Apple has paid out more than $100 billion to third-party developers.
“The platform connects app developers to a very attractive installed base of over 1.4bn devices, provides ability to download and update apps, provides developer tools to make apps easy to build and maintain, facilitates secure payment arrangements and invests significantly in R&D to bring out devices with new features like Augmented Reality (AR) that can help developers make and monetize attractive new features,” Mohan says.
In a nutshell, the Spotify accusations are certainly not good for Apple stock investors. The EC may very well rule in favor of Spotify. Fortunately, it won’t really matter. If you are an Apple stock bull, these antitrust allegations shouldn’t change your mind about the stock.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
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