Worst case App Store scenario only translates to 2% revenue hit, analyst says

Posted:
in AAPL Investors
A recent U.S. District Court ruling in the Epic Games v. Apple trial is likely to have only a limited impact on Apple's App Store revenue, even in a worst-case scenario, Morgan Stanley says.

Credit: Apple
Credit: Apple


In a note to investors seen by AppleInsider, Morgan Stanley analyst Katy Huberty assess some of the potential impacts and risks of the ruling to the App Store and Apple's bottom line. Although it's too early to tell exactly how the ruling will play out, the analyst bases her estimate on several factors.

For one, Huberty makes her analysis on the assumption that the ruling will allow developers to offer a range of alternate payment options in their apps. If the ruling is implemented, developer wouldn't be able to add their own direct payment method. However, it would force Apple to allow apps the ability to steer users to payment systems on their own sites, possibly via an in-app web browser.

Although this would result in a "relative low friction experience" compared to inputting credit card details or linking to third-party payment accounts, the change would require customers to manage multiple accounts across many developers. Huberty believes this creates more friction than current the App Store payment system.

Huberty believes that few of the 30 million app developers on the App Store could afford to introduce friction. Most of them also don't have the brand, credibility, or marketing budget to drive customers to their own websites or other app payment platforms. Customer purchasing habits are also hard to change, and Huberty believes that most consumers won't want to manage multiple direct payment accounts.

Because of that, Huberty believes the right way to frame risks to Apple and the App Store is by looking and revenue and profit exposure to the largest developers across the globe. Major developers, she theorizes, will be the only ones that can afford to introduce payment friction.

Based on this assessment, and looking at a worst-case scenario, Huberty believes that if Apple loses all revenue from the top 20 global app developers, it would equate to about a 2% impact on revenue and 5% impact on earnings-per-share (EPS).

However, Huberty points out that a Tinder experiment with direct payment methods only led about 40% of users to bypass the App Store payment platform. Using that 40% number as a basis point results in a lower revenue impact of 2% and EPS impact of 4%.

The analyst maintains her 12-month Apple price target of $168, based on a sum-of-the-parts valuation. That breaks down to a 5.8 enterprise value-to-sales (EV/Sales) multiple on Apple's product business and an 11.6x EV/Sales multiple on Apple's Services business. That results in an implied 7x target EV/Sales multiple for 2022 and a 30x target price-to-earnings multiple.

Read on AppleInsider

Comments

  • Reply 1 of 5
    I believe Apple has may more options than we realize, I am restating a previous post as an example:
    Apple can change their store policy and add a hosting fee, the fee is waived only when a vendor uses Apple's payment system. Also if a vendor wants to use their own external payment system they'll get a click charge and a link to their website. If they opt for an integrated experience using their own payment system there'll be a charge for that as well.
    Apple can turn this into a different type of profit center, they won't lose anything and basically make it really easy to use the current flow, and charge for alternative options.
    viclauyycaderutterMisterKitMacProjony0watto_cobra
  • Reply 2 of 5
    I believe Apple has may more options than we realize, I am restating a previous post as an example:
    Apple can change their store policy and add a hosting fee, the fee is waived only when a vendor uses Apple's payment system. Also if a vendor wants to use their own external payment system they'll get a click charge and a link to their website. If they opt for an integrated experience using their own payment system there'll be a charge for that as well.
    Apple can turn this into a different type of profit center, they won't lose anything and basically make it really easy to use the current flow, and charge for alternative options.
    Your suggestions completely ignore Apple's larger legal issues: the perception that they're a monopolist abusing their monopoly.  While the ruling has already struck down that aspect of Epic's suit down, the judge did rule that their behavior with regards to linking was anti-competitive.  Now, given that congress here in the US and the EU in Europe are also looking at Apple's practices, do you think Apple can really afford to willy-nilly introduce new fees?  One of the defining attributes of a monopolist is that they can raise prices with impunity.  Introducing the new pricing schemes you suggest would do exactly that.

    I'm completely on the judge's side with respect to her declaration that Apple does not have a monopoly - but her ruling was for the market of 'mobile gaming' (where she estimated Apple had some 53% instead of the required 66+%).  I don't know how the EU defines monopoly and, besides, they might be defining a different 'market' when they go after Apple.
    muthuk_vanalingamwatto_cobra
  • Reply 3 of 5
    tjwolf said:
    I believe Apple has may more options than we realize, I am restating a previous post as an example:
    Apple can change their store policy and add a hosting fee, the fee is waived only when a vendor uses Apple's payment system. Also if a vendor wants to use their own external payment system they'll get a click charge and a link to their website. If they opt for an integrated experience using their own payment system there'll be a charge for that as well.
    Apple can turn this into a different type of profit center, they won't lose anything and basically make it really easy to use the current flow, and charge for alternative options.
    Your suggestions completely ignore Apple's larger legal issues: the perception that they're a monopolist abusing their monopoly.  While the ruling has already struck down that aspect of Epic's suit down, the judge did rule that their behavior with regards to linking was anti-competitive.  Now, given that congress here in the US and the EU in Europe are also looking at Apple's practices, do you think Apple can really afford to willy-nilly introduce new fees?  One of the defining attributes of a monopolist is that they can raise prices with impunity.  Introducing the new pricing schemes you suggest would do exactly that.

    I'm completely on the judge's side with respect to her declaration that Apple does not have a monopoly - but her ruling was for the market of 'mobile gaming' (where she estimated Apple had some 53% instead of the required 66+%).  I don't know how the EU defines monopoly and, besides, they might be defining a different 'market' when they go after Apple.
    Apple can make conscious decisions on how to charge for their services, these are services and not monopolistic approaches. Tim Cook said that they have to pay for the service one way or another; moreover, this is exactly how Google charges for their services. The proposition here is Apple won't block vendors from doing something, but that there will be a charge for it.
    edited September 13 watto_cobra
  • Reply 4 of 5
    tjwolf said:
    I believe Apple has may more options than we realize, I am restating a previous post as an example:
    Apple can change their store policy and add a hosting fee, the fee is waived only when a vendor uses Apple's payment system. Also if a vendor wants to use their own external payment system they'll get a click charge and a link to their website. If they opt for an integrated experience using their own payment system there'll be a charge for that as well.
    Apple can turn this into a different type of profit center, they won't lose anything and basically make it really easy to use the current flow, and charge for alternative options.
    Your suggestions completely ignore Apple's larger legal issues: the perception that they're a monopolist abusing their monopoly.  While the ruling has already struck down that aspect of Epic's suit down, the judge did rule that their behavior with regards to linking was anti-competitive.  Now, given that congress here in the US and the EU in Europe are also looking at Apple's practices, do you think Apple can really afford to willy-nilly introduce new fees?  One of the defining attributes of a monopolist is that they can raise prices with impunity.  Introducing the new pricing schemes you suggest would do exactly that.

    I'm completely on the judge's side with respect to her declaration that Apple does not have a monopoly - but her ruling was for the market of 'mobile gaming' (where she estimated Apple had some 53% instead of the required 66+%).  I don't know how the EU defines monopoly and, besides, they might be defining a different 'market' when they go after Apple.
    "do you think Apple can really afford to willy-nilly introduce new fees?" If they are forced to forgo some fees, a charge for hosting files that aren't paid for through the app store makes sense to me. It's a REPLACEMENT to cover App Store services for maintenance, security etc. 
    watto_cobra
  • Reply 5 of 5
    I think they will add an additional Privacy Nutrition and inform users that this app wants to take you to their own payment gateway. Allow or decline? If user agrees then maybe some form of revenue sharing will still be enforced. If not, well nothing changes…
    edited September 13 watto_cobra
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