Opinion: How profitable is the Apple App Store? Even a historic antitrust lawsuit couldn’t tell us
Even with the profitability of its App Store at the heart of the matter, the recent antitrust lawsuit between “Fortnite” maker Epic Games Inc. and Apple Inc. could not fully reveal the amount of money flowing to Cupertino at from the applications.
This is a question investors would love to know the answer to, as it cuts across the entire business model of the App Store. Apple is not disclosing any detailed financial results for the App Store, which is part of a services company that grossed $ 54 billion in its most recent fiscal year and has been hailed as the segment that drove growth as the iPhone sales growth has slowed in recent years.
The trial offered a glimpse into the real numbers on the profitability of the App Store, but it was disputed and the real numbers were withheld. During the second week of the trial, in which the maker of Apple’s alleged “Fortnite” monopoly practices AAPL,
in federal court in Oakland, Calif., Epic called an expert witness – Ned Barnes of the Berkeley Research Group – to the stand.
Barnes calculated that the App Store had significant profit margins, which increased to 78% in 2019, from 75% in 2018, and generated $ 22 billion in commissions for Apple last year. He was part of a group of economic experts hired by Epic in their quest to prove that Apple’s App Store dominates the market.
Apple took issue with this analysis and noted that it spends billions on research and development that is not charged against these profits.
“We invest like crazy in [research and development]Cook said in his testimony at the end of the trial. He said Apple has spent $ 100 billion since the iPhone’s introduction in 2007 and $ 50 billion in the past three years. (According to the last three years of Apple’s 10-K deposits, it was $ 39.2 billion). He also noted that security and infrastructure costs, in addition to innovative features, were squeezing its profit margins.
But clearly, Apple didn’t want Barnes and his testimony to be heard at all. A few weeks before the start of the trial, Apple attorneys tried to seal the courtroom during his testimony, according to a pre-trial motion, because Barnes relied on “non-public, unaudited financial information.” The actual information he studied was not shared in open court and he was not allowed to discuss the raw numbers he saw, which were only shared with the judge behind closed doors. . Barnes did not respond to a request for comment.
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What is apple has been ready to say in the courtroom about the finances of the App Store was that his commission, the rate he charges developers to host an app on his store, has decreased over time. The 30% company commission doesn’t apply to everyone, and 85% of apps are free, commission-free, Cook said.
Apple has reported the overall margin for its “services” business since dropping iPhone unit sales from its reports amid a slowdown in unit sales two years ago. The figures he reports suggest that the big profit margin Barnes cites is probably not far off – the total services margin stood at 70.1% in the last quarter, and that includes other companies that are expected to lose money for Apple right now, like its music and TV streaming services.
Apple’s attempts to avoid talking about the billions it is absorbing from third-party apps were truly laughable. Prior to Cook’s testimony, former Apple chief marketing officer Phil Schiller was grilled by Epic lawyer Katherine Forrest, who openly laughed at him when he couldn’t tell if the App Store was profitable.
“How is it that as an executive responsible for this big company in the country, you don’t know if it’s profitable?” Asked Forrest.
“That’s not what we’re focusing on,” Schiller said. “It’s not coming.”
Forrest also reminded him of a press release issued by Apple in 2017, which said software developers have earned $ 70 billion from the App Store since its launch in 2008, which would deduct at least $ 20 billion in profits for Apple. (In court, Apple executives repeatedly called the App Store an “economic miracle” without any sense of irony when they then fooled around on its income statement.)
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With a 30% commission, Apple would have received around $ 20 billion, she said, which would strongly indicate profitability, but Schiller again said he didn’t know.
It’s hard to believe that Apple doesn’t care about its App Store profits, having spent years focusing on doubling its services business from 2016 to 2020, telling investors and analysts it was extremely important for the future of the company. When replacing iPhone unit sales with services gross margin in its investor statements in early 2019, Cook said, “It is important for us to increase gross margin in dollars” in the services segment.
“If sometimes we develop services that have a lower than average gross margin level, as long as it is good for the customer and as long as we generate gross margin dollars, we will be very happy,” he said. . said on a conference call with analysts.
Some trial observers and analysts did not buy Apple’s evasiveness on the high margins of its App Store.
“We believe that Apple’s position at trial regarding its lack of knowledge about such a critical driver of service profitability lacks credibility,” Nick Rodelli, CFRA analyst who followed the trial, said in an email. . “I have to be clear that this is our opinion only; of course, that is for the judge to decide.
Rodelli added that he believed Epic’s evidence on the level of Apple’s profit margins was “frankly overwhelming.”
“Apple did not present its own information on the App Store margins during the trial, they simply claimed that it was something they had not followed and that they were not aware of in detail. and attacked the numbers presented by Epic, ”he said.
He noted that Epic’s position was based on internal Apple documents, including a presentation made to Cook, Apple’s CFO and Epic’s public accountant.
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In its defense, Apple claims that Epic, a company of around $ 29 billion on paper, is being hypocritical for claiming profits from the App Store when it seeks to get its own app store under the umbrella. from the App Store. The end of Epic’s game, according to Apple’s reasoning, is to charge big commissions and ultimately become a trillion dollar business.
Apple’s profit evasion in its App Store is spurious. Judge Yvonne Gonzalez Rogers, who decides the case, had a negative reaction to Apple’s 30% commission, saying she was troubled by the figure. She may also have issues with obtuse comments from her executives, who clearly run a for-profit business and certainly know the details of their business.
The attempt to keep the wool in the eyes of the public and investors could ultimately hurt Apple in the bottom line of the deal – and potentially the business model at the heart of its services business.
MarketWatch writer Jon Swartz contributed to this article.