Call (NASDAQ: AAPL) seems to have everything after the event to a fourth quarter missing income. However, Congress has focused its sights on several major technology companies – and despite your market capitalization, the government is bigger. Apple has not grown by making huge acquisitions, and it does not dominate a system, either Amazon.com‘s (NASDAQ: AMZN) led in e-commerce. However, Apple’s App Store seems to be a real anti-trust risk that some take seriously.
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Congress focuses on four companies on anti-trust concerns: Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), Apple, Amazon, and Facebook (NASDAQ: FB). The central theme of the ongoing anti-trust investigations amidst what, if any, unfair practices each of these companies are engaging in.
Image Source: Getty Images.
Yahoo Finance’s Daniel Roberts concluded that “Apple in particular has reason to be the most unmanned of the four when it comes to lawmakers threatening anti-trust action.” Unlike Apple, the other companies have made significant acquisitions, as if they clearly dominate a particular company. Theoretically, the government could force these Goliaths to remove previous acquisitions or change their business models.
But these arguments seem to miss that a monopoly does not have to result in acquisitions. Think of the almost perfect example of Microsoft‘s (NASDAQ: MSFT) anti-trust issues in the 1990s. The company dominated PC operating systems and included its Internet Explorer browser with every copy of Windows. A federal district court judge ruled that this binding practice was unfair, and that Microsoft should be split into two different companies. If a higher court had not reversed this decision, today, Microsoft can be a very different company.
Most anti-trust issues are resolved based at least in part on the Sherman Antitrust Act. The Act states that “only unjustified restriction of trade through acquisitions, mergers and exclusionary tactics” constitutes an infringement. That last article – exclusion tactics – Apple investors should be concerned.
One of these things is not like the others
The four companies in the government’s view appear to have differences in anti-trust risk.
|
Items |
Alphabet |
Amazon |
Call |
|
|---|---|---|---|---|
|
Providing anti-trust |
Search with Google |
Amazon Online Stores |
App Store |
Facebook / Instagram |
|
Competition |
Bing / Yahoo / others |
Etsy (NASDAQ: ETSY) / Wayfair (NYSE: W) / Overstock.com ) |
None |
Twitter / Snapchat / LinkedIn / others |
(Source: Investopedia. Table by Author.)
The list above is not meant to be exhaustive, yet we can see a clear difference between the four companies. In traditional search, Google may be the leader, but Facebook received 1.5 billion searches last year. And more consumers are starting their search for online shopping on Amazon than anywhere else.
When it comes to Facebook, the pandemic-driven users are growing Twitter (NYSE: TWTR), Snapchat (NYSE: SNAP), and Microsoft’s LinkedIn ownership is likely to help curb regulators’ concerns.
What about Amazon? Since Q1 2017, at least 50% of Amazon’s unit sales came from third-party sellers. This seems to argue against the e-commerce giant that is anti-competitive. While it is true that Amazon is taking a cut from third-party sales, so will it eBay (NASDAQ: EBAY) – normally with 10% final value fee, payment fees and other potential upgrade costs. If you choose Etsy, you will pay similar transaction and payment fees, listing fees, and more. It is also possible, if less desirable for customers, to sell through options such as ads or other apps.
As far as Apple is concerned, there is no other legal way download and install an app on an iOS device. If a lack of competition forms a monopoly, this can be a problem for the company.
Break a monopoly?
Looking at how the App Store works, the facts seem to pile up against Apple. First, Apple only decides which apps allow it in its store. According to the company, 60% of the apps are approved, yet 40% are rejected for “minor bugs, followed by concerns about privacy.”
Second, Apple charges a commission of 15% to 30%, depending on the situation. With no other option pay or lose developers access or millions of iOS users. Apple goes out of its way to say that 84% of its apps are free and developers pay nothing. However, there is an annual fee of $ 99 to be part of the Apple Developer Program.
Third, there are examples of companies with branding that could circumvent the Apple toll, but smaller developers have no choice. For example, the email app Hey costs $ 99 annually, but does not offer an option to pay through the App Store. Apple told developers to add an app sign-in option if face for the app is removed.
By contrast Netflix (NASDAQ: NFLX) en Spotify (NYSE: SPOT) no longer allow customers to sign up for their service through iOS to pay Apple’s fees. It seems that the App Store is the definition of a monopoly. If the government decides this is the case, today’s Apple could be very different from tomorrow’s Apple.
How antitrust could change Apple
Last quarter, Apple generated $ 13 billion in services revenue, generating a gross margin of more than 67%. However, a strong antitrust action could change some of the math. Apple Music costs about the same as its competition, yet Apple does not have to pay a 15% to 30% commission to sell its own service.
The European Commission is conducting an ongoing investigation into practices of Apple’s App Store. The preliminary investigation found that Apple Music’s competitors had removed their in-app subscription option, or increased their in-app prices to pass on Apple’s fees to customers. Apple’s App Store guidelines specifically stipulate that in-game subscriptions, currency, or access to premium content must use in-app purchases. The use of Apple’s in-app purchases, instead of allowing developers to use payment methods outside of Apple, is the very definition of “exclusionary tactics” mentioned in the Sherman Antitrust Act.
Meanwhile, the curated games from Apple Arcade, “will not be available on any other mobile platform than in any other subscription service.” In addition, it is not possible to play these games on iOS without subscribing to Arcade. While the game developers obviously choose if they want to join Arcade, they do not have much choice about the limitations. It’s not unique to certain games to be site-specific (many game consoles only have titles available on that particular system), but this is not a single game or a few games – it’s roughly 100 games that are essentially disconnected from Android users and all non-Arcade subscribers. The fact that some Arcade games are available on PS4, Xbox One, and PC, but not on Android, seems designed to distort mobile competition.
Antitrust action could force Apple to spin out the App Store, or at least open up its ecosystem. Opening their App Store to competition would mean you would have to pay less to app developers to compete effectively. This action would grow potential revenue and compress margins. A full spinoff would mean Apple would have to pay a commission for its services, such as Apple Music, which have so far been given a free ride.
With Apple shares trading at a forward P / E ratio of more than 33 – much higher than they have been at any given time in the past decades – they can not really be described as a great value.
It is difficult to measure how Apple will ultimately be affected by persistent concerns about anti-trust. However, investors should be aware of this risk for the future of the company, and adjust their expectations accordingly.
