App Store antitrust lawsuit predicted to impact Apple stock price for years

Posted:
in AAPL Investors
The fallout from the U.S. Supreme Court's decision to allow an antitrust lawsuit against Apple over an alleged monopoly on iOS apps via the App Store won't immediately affect the company, suggests Morgan Stanley, but the legal threat could affect the stock value for years.




On Monday, the U.S. Supreme Court voted 5 to 4 to permit a 2011 case arguing the App Store was a monopoly that led to artificially inflated prices to continue, and to sue Apple over perceived antitrust issues. As to be expected analysts are starting to offer their reactions to the news, with Morgan Stanley suggesting it could have far-reaching consequences for the rest of the tech industry, not just Apple.

For the near term, there will be "no fundamental change to how Apple operates the App Store, nor is there any impact to Apple's profit and loss," writes Morgan Stanley in a note to investors seen by AppleInsider. The decision however will mean that Apple will face antitrust lawsuits from consumers and "potentially app developers," along with the added threat from complaints by Spotify to the European Commission, requiring Apple to plead its case in court.

Referencing how Apple management and other storefronts, including Google for the Google Play Store, have "vigorously argued that their App Store business model has solid justification," the analysts point out the 30% fee Apple applies to most one-time App Store transactions is on a par with traditional retail and commercial IT distribution markets, which operate at a margin of 20% to 30%. The firm also points to how Netflix is pushing consumers to download the app for free but handle the signup and payment process itself, avoiding the fee.

"It's highly likely that these eventual lawsuits take years to make their way through the US legal system, thus leaving a regulatory/legal overhang for the stock that first gained momentum when SCOTUS heard the case in late 2018," states Morgan Stanley.

Analysts see a "range of potential outcomes" for the situation, but stresses that a final outcome won't be expected for years. A best-case scenario is for any antitrust lawsuits to be quashed in the court, maintaining the status quo and validating Apple's arguments.

On a "bad but not the worst case" scenario, Apple loses lawsuits and pays monetary damages equivalent to the different between the price paid by consumers and the price determined by the courts to have been payable in a competitive market. The note references Apple's Supreme Court ruling for eBook pricing that involved a refund to consumers, of around $400 million, though uses it as an example of Apple paying a fine but retaining the business model.

The last worst-case scenario would "entail Apple modifying the App Store business model, either by lowering the 30% take rate they charge or opening up the iOS platform to include other, competing App stores."

The ruling would have far-reaching effects, with the Google Play Store likely to be equally affected by a decision, potentially opening Google up to lawsuits alleging anticompetitive practices, though the relatively small amount of revenue that Google earns from the store means there will be fewer stock implications if that happens.

For game developers and publishers, there could be an upside, as a forced reduction of the 30% fee could help make apps more attractive, or simply provide more revenue.

On a slightly less likely basis, other firms that receive commission for matching supply with demand, including online retailers, could face similar legal challenges. "We note, however, that unlike app stores on closed mobile ecosystems, most internet businesses operate in competitive markets with low/no barriers to entry," Morgan Stanley reasons.

Comments

  • Reply 1 of 11
    beeble42beeble42 Posts: 4member
    So software went from costing multiple tens to multiple hundreds of dollars before the app store model down to single digits. Could someone explain where the inflated prices are? This has resulted in the general expectation that software costs less than it used to across more platforms than just iOS. The average price of most Mac software has also gone down as people are used to paying a couple of dollars for something on their phone and are less willing to pay the old style prices for software on their Mac. Software has always had these low, low prices on iOS so they can't compare the current situation to a previous one to justify the claim of inflated prices. They can only compare to the situation on other platforms where the prices were literally orders of magnitude higher, and have now seem to have come down some. I do not think that word means what they think it means!
    sportyguy209foregoneconclusionMacQcsdw2001StrangeDayspscooter63n2itivguyviclauyyc
  • Reply 2 of 11
    The implications extends far beyond the App Store. 

    Why would this not apply to swag sold at Disney, or sports event, or other entertainment venues? Many entertainment venues use exclusive ticketing vendors who charge comparable markup. 

    Many retailers strictly control their suppliers and markup as well. 

    Apple's App Store may seem like a monopoly, because of the iPhone's high market share in the US, and the fact that the App Store has twice the revenue of Google Play. Globally iPhone is just 15% of the market. In China, WeChat is the market place for all Apps. Anyone can jail break an iPhone to get un-vetted Apps and lose Apple's security and warranty.

    The Supreme Court has set a dangerous precedent that can empower intimidation lawsuits to on-line and off-line stores who may not have the legal resources to fight back. And how does anyone decide fair mark-up? 30% is not excessive for retail in general. Should the courts, rather than Apple, decide which Apps are safe? And which Apps are ripoff copies of other Apps? Can I force Macy's to sell fake knock-off of Levi's?
    red oaksportyguy209mwhiteflyingdpMacQcpscooter63n2itivguyviclauyycaaarrrgggh
  • Reply 3 of 11
    flydogflydog Posts: 259member
    beeble42 said:
    So software went from costing multiple tens to multiple hundreds of dollars before the app store model down to single digits. Could someone explain where the inflated prices are? This has resulted in the general expectation that software costs less than it used to across more platforms than just iOS. The average price of most Mac software has also gone down as people are used to paying a couple of dollars for something on their phone and are less willing to pay the old style prices for software on their Mac. Software has always had these low, low prices on iOS so they can't compare the current situation to a previous one to justify the claim of inflated prices. They can only compare to the situation on other platforms where the prices were literally orders of magnitude higher, and have now seem to have come down some. I do not think that word means what they think it means!
    Even if the price of software has gone down (it hasn't), that fact that the price of software in general has gone down is irrelevant. The question as far as antitrust law is concerned is whether there is an unreasonable restraint of trade, who would occur when a company controls pricing and other terms by virtue of a horizontal monopoly. In this case, the allegation is that all consumers pay up to 30% more than they would by purchasing the apps than they would if there was an alternative to the App Store. Whether that 30% is on top of lower or higher prices compare to 30 years ago makes no difference. In fact, no one has alleged that the price of software overall has gone up compared to past years. But obviously if you pay 30% more today than you would from a competing App Store on the same day, you are paying more.
    78Bandit
  • Reply 4 of 11
    gatorguygatorguy Posts: 20,445member
    The last worst-case scenario would "entail Apple modifying the App Store business model, either by lowering the 30% take rate they charge or opening up the iOS platform to include other, competing App stores."

    The ruling would have far-reaching effects, with the Google Play Store likely to be equally affected by a decision, potentially opening Google up to lawsuits alleging anticompetitive practices, though the relatively small amount of revenue that Google earns from the store means there will be fewer stock implications if that happens. 
    Personally I think it unlikely that even an unfavorable outcome for Apple would have any significant effect on Google Play directly. They already allow competing app stores and side-loading as part and parcel of the operating system. As an example Fortnite recently chose to bypass Google Play and offer their game app directly to Android devices where a simple toggle-setting change allows the installation without paying Google a cent.  Of note, Google still protects those users from malicious app installs even when sideloaded.

    On iOS there is no such option barring enterprise-like apps which have very specific restrictions imposed on them by Apple.

    ...and no, jailbreaking is not an Apple offered or permitted option for installing apps outside of the AppStore
    viclauyyc
  • Reply 5 of 11
    mknelsonmknelson Posts: 322member
    flydog said: Even if the price of software has gone down (it hasn't), that fact that the price of software in general has gone down is irrelevant. The question as far as antitrust law is concerned is whether there is an unreasonable restraint of trade, who would occur when a company controls pricing and other terms by virtue of a horizontal monopoly. In this case, the allegation is that all consumers pay up to 30% more than they would by purchasing the apps than they would if there was an alternative to the App Store. Whether that 30% is on top of lower or higher prices compare to 30 years ago makes no difference. In fact, no one has alleged that the price of software overall has gone up compared to past years. But obviously if you pay 30% more today than you would from a competing App Store on the same day, you are paying more.
    You self-contradict several times masking your point - you may want to go back and edit for clarity.

    Even if there were an alternate store you wouldn't see a price drop of 30%. That store would also have a markup. Even if the App publishers are self publishing they would incur costs for whatever alternate payment system/eCom system they sell through.
    mwhiten2itivguysarthos
  • Reply 6 of 11
    gatorguygatorguy Posts: 20,445member
    mknelson said:
    flydog said: Even if the price of software has gone down (it hasn't), that fact that the price of software in general has gone down is irrelevant. The question as far as antitrust law is concerned is whether there is an unreasonable restraint of trade, who would occur when a company controls pricing and other terms by virtue of a horizontal monopoly. In this case, the allegation is that all consumers pay up to 30% more than they would by purchasing the apps than they would if there was an alternative to the App Store. Whether that 30% is on top of lower or higher prices compare to 30 years ago makes no difference. In fact, no one has alleged that the price of software overall has gone up compared to past years. But obviously if you pay 30% more today than you would from a competing App Store on the same day, you are paying more.
    You self-contradict several times masking your point - you may want to go back and edit for clarity.

    Even if there were an alternate store you wouldn't see a price drop of 30%. That store would also have a markup. Even if the App publishers are self publishing they would incur costs for whatever alternate payment system/eCom system they sell through.
    Fortnite: App handled quite differently depending on the platform. 

    "Epic CEO Tim Sweeney, in a Q+A with Eurogamer, said that avoiding Google’s 30% distribution fee is a major part of his company’s motivation. In his words, the fee is “disproportionate to the cost of services these stores perform, such as payment processing, download bandwidth, and customer service.”
    edited May 15
  • Reply 7 of 11
    mwhitemwhite Posts: 188member
    flydog said:
    beeble42 said:
    So software went from costing multiple tens to multiple hundreds of dollars before the app store model down to single digits. Could someone explain where the inflated prices are? This has resulted in the general expectation that software costs less than it used to across more platforms than just iOS. The average price of most Mac software has also gone down as people are used to paying a couple of dollars for something on their phone and are less willing to pay the old style prices for software on their Mac. Software has always had these low, low prices on iOS so they can't compare the current situation to a previous one to justify the claim of inflated prices. They can only compare to the situation on other platforms where the prices were literally orders of magnitude higher, and have now seem to have come down some. I do not think that word means what they think it means!
    Even if the price of software has gone down (it hasn't), that fact that the price of software in general has gone down is irrelevant. The question as far as antitrust law is concerned is whether there is an unreasonable restraint of trade, who would occur when a company controls pricing and other terms by virtue of a horizontal monopoly. In this case, the allegation is that all consumers pay up to 30% more than they would by purchasing the apps than they would if there was an alternative to the App Store. Whether that 30% is on top of lower or higher prices compare to 30 years ago makes no difference. In fact, no one has alleged that the price of software overall has gone up compared to past years. But obviously if you pay 30% more today than you would from a competing App Store on the same day, you are paying more.
    No way I wouldn't trust anyone but Apple Store.
    edited May 15
  • Reply 8 of 11
    robin huberrobin huber Posts: 3,252member
    Speaking of Apple’s long term profitability. A bit off topic, but what the heck. Was watching a doc on Independent Lens (PBS) called “The People’s Republic of Desire.” A fascinating look at a phenomenon of popular culture in China where online “hosts” basically beg for “gifts” (money) from both everyday impoverished fans and high rolling sugar daddies. There are even “syndicates” (leagues) of hosts controlled by owners. I noticed that all of the successful hosts, high rollers, and owners used iPhones. One even took pains to note that hers was not a fake. Clearly, the iPhone continues to be an aspirational device even in the land of abundant and worthy competitors. [posted on another thread but thought it applied here too]
  • Reply 9 of 11
    brucemcbrucemc Posts: 1,527member
    The SCOTUS is more conservative now, so I think that is in Apple's favour.  The decision even to proceed was 5-4.  Burden of proof of harm due to monopoly will be much higher than burden to proceed to have the SC hear the issue.

    In the US, in terms of installed base, Apple is thought to be about 50%.  Purchasing a non-Apple smartphone is trivial, and switching very low effort.  Almost every app is available for Android.  Certainly a far cry from a monopoly.  Tough to see how they can prove monopoly, even with a broad interpretation.

    On the contention of increasing price by taking 30% - how is that the case when other application stores charge similar?  If subscription, Apple allows subscribing outside the app, and using that sign-on within an App Store app (downloaded for free).  Apple receives nothing in this case, and it is open to anyone.

    Needs to be weighed against security implications of opening up to other stores (I will leave it to Google Guy to provide stats on the different malware of Android vs. iOS).  I certainly don't want my security impacted because of class-action lawsuits that are pushed entirely to extort money from successful companies.

    The only way I see this coming to a judgement against Apple is if activists judges decide they want to take a significant different interpretation of monopoly, choice, and harm than historical, because they want to limit the powers of technology giants.  AND because Apple has more money, and US gov't wants their cut.
  • Reply 10 of 11
    sdw2001sdw2001 Posts: 16,990member
    The implications extends far beyond the App Store. 

    Why would this not apply to swag sold at Disney, or sports event, or other entertainment venues? Many entertainment venues use exclusive ticketing vendors who charge comparable markup. 

    Many retailers strictly control their suppliers and markup as well. 

    Apple's App Store may seem like a monopoly, because of the iPhone's high market share in the US, and the fact that the App Store has twice the revenue of Google Play. Globally iPhone is just 15% of the market. In China, WeChat is the market place for all Apps. Anyone can jail break an iPhone to get un-vetted Apps and lose Apple's security and warranty.

    The Supreme Court has set a dangerous precedent that can empower intimidation lawsuits to on-line and off-line stores who may not have the legal resources to fight back. And how does anyone decide fair mark-up? 30% is not excessive for retail in general. Should the courts, rather than Apple, decide which Apps are safe? And which Apps are ripoff copies of other Apps? Can I force Macy's to sell fake knock-off of Levi's?

    I agree with much of this.  You're right about other marketplaces and events.  Exclusivity is not new, nor is it illegal as far as I know.   

    I disagree on several points, though.  First, the app store is a monopoly....on iOS.  However, monopolies are not always or even usually illegal.  It's not clear to me that this will be found to be an illegal monopoly because there are other smartphone platforms with similar features and often, the exact same apps.  Apple controlling their platform and charging a flat rate for their hosting and distribution services hardly seems anti-competitive to me.  If anything, it seems developers and thereby consumers are treated equally.  

    Secondly, I flatly disagree with your comment about SCOTUS.  Allowing a case to proceed hardly empowers "intimidation" lawsuits.  It's not even like they agreed to hear the case.  They just let it proceed at the lower level.  There was no determination made on the merits whatsoever.  Take this section from the majority opinion:   

    "...At this early pleadings stage of the litigation, we do not assess the merits of the plaintiffs’ antitrust claims against Apple, nor do we consider any other defenses Apple might have. We merely hold that the Illinois Brick direct-purchaser rule does not bar these plaintiffs from suing Apple under the antitrust laws."

    It really is a simple call of whether or not Apple can be sued based on its claim it is a pass-through, not the seller.  Kavanaugh and the Court's liberals clearly and strongly believed Apple was the seller, even though it was taking a commission, not developing the apps or setting prices.   Interestingly, I read part of Gorsuch's dissent, and he makes an equally strong case in the other direction:

    "The lawsuit before us depends on just the sort of pass-on theory that Illinois Brick forbid.....[t]he problem is that the 30% commission falls initially on the developers. So if the commission is in fact a monopolistic overcharge, the developers are the parties who are directly injured by it. Plaintiffs can be injured only if the developers are able and choose to pass on the overcharge to them in the form of higher app prices that the developers alone control....."  

    Gorsuch then goes on to state that many apps are $ 0.99, as Apple requires apps to end with a  $0.99 price.  He notes this means developers of a $0.99 app can't just add 30 cents to the app to cover the commission, they would have to double the price, which may affect sales.  It therefore puts downward pressure on the price, not upward pressure.  

    It's an interesting debate.  It's hardly the end of the world, even if you disagree with he decision.  I personally think on the merits, Apple is going to win.  It's going to be very hard to show they have an illegal monopoly when they are charging 30%, app prices are what they are, and there are alternatives in the smartphone/tablet market.  



  • Reply 11 of 11
    StrangeDaysStrangeDays Posts: 7,298member
    flydog said:
    beeble42 said:
    So software went from costing multiple tens to multiple hundreds of dollars before the app store model down to single digits. Could someone explain where the inflated prices are? This has resulted in the general expectation that software costs less than it used to across more platforms than just iOS. The average price of most Mac software has also gone down as people are used to paying a couple of dollars for something on their phone and are less willing to pay the old style prices for software on their Mac. Software has always had these low, low prices on iOS so they can't compare the current situation to a previous one to justify the claim of inflated prices. They can only compare to the situation on other platforms where the prices were literally orders of magnitude higher, and have now seem to have come down some. I do not think that word means what they think it means!
    Even if the price of software has gone down (it hasn't), that fact that the price of software in general has gone down is irrelevant. The question as far as antitrust law is concerned is whether there is an unreasonable restraint of trade, who would occur when a company controls pricing and other terms by virtue of a horizontal monopoly. In this case, the allegation is that all consumers pay up to 30% more than they would by purchasing the apps than they would if there was an alternative to the App Store. Whether that 30% is on top of lower or higher prices compare to 30 years ago makes no difference. In fact, no one has alleged that the price of software overall has gone up compared to past years. But obviously if you pay 30% more today than you would from a competing App Store on the same day, you are paying more.
    Nonsense. Software has gotten cheaper, especially in mobile. There were paid mobile apps prior to the iphone. But even within iphone app store, apps have declined to free and .99, etc. That’s cheap. 

    There being a 30% fee in distribution doesn’t mean that the developer is charging 30% more than wholesale pricing otherwise. Prior to online app stores, software was sold in retail channels, where I worked for many years. To get into the retail inventory channel, you have to...pay distributors. And retailers marked up on top of distributors. So the cost of the product produced by the developer was marked up along the way before getting to the consumer. It is still the same today, except the middle man has been removed (the distributor), leaving only the retailer’s markup to the wholesale cost. 

    Good luck trying to tell me we’re getting ripped off paying .99 for apps. 
    JinTechmwhitepscooter63n2itivguyJFC_PAsarthos
Sign In or Register to comment.