Apple has made two changes in the past week related to steering, most recently making it easier for media app developers to build a direct payment relationship with the user. The first change was news worthy and the second was investor worthy. There will likely be more changes to come, given it will likely take years to define the long-term app store policies for the tech industry. The bottom line, Apple and other tech companies will likely have to make further app store policy concessions, and investors will largely look through these developments given once the company anniversaries changes, app store growth rates should return to pre-regulation levels.
The App Store is financially important
I approach the question about the impact to Apple’s model by framing how much of Apple’s business is directly related to apps. For starters, the Services business accounts for about 20% of revenue. I believe apps account for about a third of Services revenue, or about 7% of total company revenue. Since Services gross margin is double the company average, it’s appropriate to model apps account for about 14% of total profits. Based on Apple public filings related to the Epic trail, I believe media related apps account for about 15% of app revenue, or 1% of overall revenue, and games account for the vast majority (70%-80%) of app billings (based on fillings from the Apple v. Epic trial). I believe it’s wise to anticipate that eventually gaming apps will also be allowed to steer toward off-platform payments.
Users will likely stay in the garden
A fundamental question is whether Apple users will continue to transact in the walled garden if they have an option to transact directly with the app developer. Our belief is the vast majority of users will stay within the Apple payment and app ecosystem because it’s more secure and easier. Developers should favor transacting within the garden because paid customer conversion will be higher given the ease of payment Apple enables.
Even if the take rate bends, growth will return to the App Store
I believe the 30% and 15% take rates will hold for the next five years plus. If I’m wrong, and Apple has to lower its take rate, it will create a one year headwind to the Services segment growth rate. This is a similar headwind Amazon experienced when it was forced to start collecting taxes on all sales. The path is predictable: growth dips in the first year after the change, then steps back up to a level similar to where it was before the change. Investors understand this dyammic and will likely largely give Apple a pass on any further changes to app store policies.