skip to Main Content
Apple’s App Store Is an Important Part of Its Profitability — And It’s Not Changing
The Supreme Court rules that Apple does not have give developers the option to steer payments outside of the App Store. That means that status quo of the App Store business model which should generate about 20% of the company's operating income this year is intact. The ruling also keeps Apple one step ahead in Washington's pursuit of big tech regulation.

Key Takeaways

The Supreme Court rules that Apple does not have give developers the option to steer payments outside of the App Store.
The App Store's profitable economics will stay intact.
Apple can now say to Washington: Stay away from our App Store.
The regulation conversation will linger.
Get ready for the start of Vision Pro App Store revenue in 2024.

A win in court for Apple

Taking a step back. In 2021, Epic Games tested whether Apple can continue to force developers to use its payment system. The ruling was largely in Apple’s favor, with the exception that the lower court said Apple must allow developers the opportunity to steer their customers to their own payment platforms, notifying them that they can make a purchase on the web and don’t need to go through the app — something that would likely mean Apple would make less money from its App Store. 

Fast forward to this week, and the Supreme Court reversed the steering ruling from 2021. Now Apple no longer has to allow developers the option to steer customers outside of the App Store for payments. 


Why the App Store is important to profits

In May, Apple announced App Store developer billings were $1.1T in 2022, up 29% y/y based on a 21-page independent study from Analysis Group. Growth in 2021 and 2020 were each 27%.

The study breaks down App Store billings into three categories: digital goods ($104B), physical goods ($678B), and in-app advertising ($88B). Adding the segments up gets to $1.1T.

I estimate about 35% of Services revenue is from the App Store or about $27B in FY22.

Last year Apple made most of the App Store revenue from physical goods billings of $678B. If all of the App Store revenue was from digital goods (which it’s not) the effective take rate would be 26%, which is in line with the advertised 15-30% rates.

Putting it together, App Store revenue was about $27B in FY22. I estimate the operating margin on the segment is about 85% or accounting for $23B in FY22 operating income. That compares to Apple reporting $119B in operating income in FY22.  In other words, in FY22 App Store accounted for about 7% of sales and 20% of operating income. In FY23 I expect those percentages to land at 8% of revenue and 20% of operating income.


The tensions between Silicon Valley and Washington

There’s been tension between Washington and Silicon Valley for the past five years. The general mood in Washington is big tech needs to be regulated or broken up because they are making too much money. Lawmakers see the profits at many of these companies and feel it’s unfair to consumers. 

This ruling essentially allows Apple to say to Washington: Stay away from our App Store.

Long-term investors can sleep well at night knowing that the chances that the App Store business model is disrupted by Washington just declined. There’s also a domino effect for other regions of the world.  If the US legal system had said Apple needs to allow steering, then other countries would use it to force Apple to steer in their country too. The status quo is a win for Apple.


Preparing for future regulation waves

A Supreme Court win is important because it shuts the door to steering in the near term. While the probability that Apple will make changes to the App Store has declined because of the ruling, the topic will not go away. Apple still makes a lot of money with the App Store, and lawmakers still want to find ways to land a punch on Apple. That motivation will create innovation in Washington to try and find ways to needle at big tech business models, whether Apple with the App Store, Amazon in AWS, Google in search, or Microsoft in AI. The topic of regulation will be a recurring theme. 

As for timing, it’s been about once every two years that something big pops up for each tech giant when it comes to regulation. The original Epic Games ruling was two years ago, in 2021, so probably in the next year we’re going to hear something new come out from Washington targeting Apple. Microsoft just wrapped up its battle related to the acquisition of Activision.

The good news is what we learned here:  First, it takes a long time to resolve these, and, second, it’s hard for Washington to impact these businesses.



Vision Pro and the App Store

For Apple, the court win is particularly important because early next year they’re going to be launching a new segment to the App Store around spatial computing and Vision Pro. Long-term Vision Pro has a wide range of potential outcomes. Some believe it will have a relatively small impact on revenue and earnings. I believe it will be the platform, which includes both hardware sales and sales of apps, that will be measurable to growth over the next five years, somewhere between the Mac and iPad (10% of revenue) and the iPhone (50% of revenue).

The fact that they now don’t have to allow steering for spatial computing apps is an under-the-radar win for Apple in this decision. 


Subscribe to our newsletter

"*" indicates required fields

This field is for validation purposes and should be left unchanged.
Back To Top