MW Apple's walled ecosystem is under pressure in Europe, but the revenue is still flowing
By Jurica Dujmovic
Apple is astutely guarding its proprietary golden goose
Apple's response reflects a calculated strategy to preserve its lucrative services revenue model.
Due to regulatory pressure from the European Union, Apple $(AAPL)$ is making significant changes to its tightly controlled "walled garden" ecosystem.
The tech giant is being forced to make unprecedented adjustments to its App Store, service offerings and iPad operating system (OS) in response to the EU's Digital Markets Act $(DMA)$, which targets anticompetitive practices among large tech firms.
To adhere to DMA requirements, Apple now must allow third-party app stores to be accessed and downloaded on iOS devices. (Previously, Apple's App Store was the only way consumers could download apps on iPhones and iPads.) To facilitate the transition, the company has introduced a new review process called "notarization," aimed at ensuring platform integrity and user protection from malware.
In addition to its own in-app purchase system, Apple also has to allow alternative payment systems and methods within apps and inform EU users about them, including App Store product page labels and in-app disclosure sheets. One downside: Apple acknowledges it will have less control over scams or harmful content in apps not distributed through its App Store.
The company will also make adjustments in its fee structure in response to the DMA. Apple has reduced its commission to 17% for transactions, a notable decrease from the standard 30%, for developers who continue distributing their apps through the App Store under new terms.
The reduction applies to all app sales and in-app purchases, except for developers in the App Store Small Business Program and for subscriptions after their first year, which are eligible for an even lower 10% rate. However, if developers use Apple's in-app purchase system, an additional 3% fee will be levied, which raises Apple's total fee to 20% for standard transactions or 13% for eligible discounts.
Implications for investors
So, what do all these changes mean for Apple, developers and stock investors?
First of all, one thing is obvious: Apple's response to the DMA reflects a calculated strategy to preserve its lucrative services revenue model, while grudgingly complying with regulatory mandates to open its famously closed iOS ecosystem.
Allowing third-party app stores and alternative payment processors has been portrayed as enhancing competition and developer choice. A deeper look reveals that Apple's primary intent is creating new revenue streams and pricing levers to offset potential App Store commission losses.
Central to this strategy is the new "core technology fee" - a 0.50 euro charge for every app install/reinstall (beyond the first 1 million annual installs for AppStore apps), regardless of distribution channel. This decouples Apple's services monetization from being solely tied to its App Store cut of digital sales.
For apps with smaller install bases, the core tech fee may be manageable (especially if app is on the AppStore). But for marketplace apps, and especially those with tens of millions of EU users, this could quickly amount to millions in annual fees that developers must absorb or pass through to consumers.
It's a savvy move by Apple to extract value for its integrated software platform, APIs, and development tools that all iOS apps rely upon, regardless of how developers choose to distribute or process payments.
Investors should view this as Apple protecting a key revenue stream. The strategy maintains Apple's dominance in high-margin services revenue, signaling that the company will continue to exert tight control over iOS. This suggests that, at least initially, the path of least resistance and lowest cost for developers will remain through Apple's ecosystem. The anticipated fragmentation and emergence of multiple app stores appear to be less immediate than some had predicted.
There are certainly opportunities for niche apps to bypass Apple's payment stack. And more alternatives could emerge over time if the core tech fee proves burdensome. But for now, Apple seems to have deftly evolved its pricing model to keep mainstream developers invested in its thriving services business.
Key risks bear watching. Fragmentation and divisive financial incentives could progressively undermine Apple's premium integrated experience and developer relations. But in the near-term, these changes insulate the revenue engine under the guise of openness.
Investors should view Apple's moves as the first salvo in retaining control of its platform, even as mandated policy shifts force this evolutionary transition. The competitive iOS landscape is indeed changing, but Apple is astutely guarding its services revenue - at least for now.
More: Apple vs. the world: Can the tech giant survive a global regulatory onslaught?
Also read: EU's record Apple antitrust fine is just the start of a Big Tech regulatory crackdown this year
-Jurica Dujmovic
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 08, 2024 07:11 ET (11:11 GMT)
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