An injunction and ruling in the closely observed Epic Games Inc. case against Apple Inc. has the potential to cut to the core of the Apple App Store’s profits, but a federal judge also said this specific case had failed to show Apple was an illegal monopolist.
On Friday, U.S. District Court Judge Yvonne Gonzalez Rogers ordered that Apple
be enjoined from forcing developers to receive payment for their mobile software applications only within Apple’s App Store. Developers must now be allowed to provide an external link for consumers to make purchases outside of the App Store, where Apple charges developers a commission of up to 30%. Apple has 90 days to comply with the judge’s order.
While Apple has never provided a breakdown of revenue and profit for its App Store — it’s estimated to make up the bulk of its services business — an expert witness during the trial estimated that Apple’s profit margins in the App Store were as high as 78% in 2019. In fiscal 2020 the services business generated $54 billion in revenue and is on target for approximately $70 billion in fiscal 2021 revenue. It has become a huge focus for investors, as revenue from the iPhone has slowed.
The judge also determined, based on the evidence during the trial, that 70% of the App Store revenue comes from video games, and, additionally, that this 70% of the revenue comes, remarkably, from less than 10% of all App Store consumers.
“These gaming-app consumers are primarily making in-app purchases which is the focus of Epic Games’ claims,” Rogers wrote in a 185-page order that reviewed all the evidence examined during the trial. “By contrast, over 80% of all consumer accounts generate virtually no revenue, as 80% of all apps on the App Store are free.”
Some Wall Street analysts remained optimistic about Apple’s revenue generation via the App Store, because it’s open to question whether consumers will actually expend the effort and time to move outside the App Store to make payments.
“Overall, we think the eventual impact from here will be driven by [a.] how many developers will continue to use Apple’s payment system for ease of use and [b.] will
gamers really stop a game midway to go to a website and purchase the needed widget?” wrote Amit Daryanani, an analyst at Evercore ISI, in a note.
The Friday ruling, though, could also have an impact on the revenue of other mobile app stores. R.W. Baird analyst Colin Sebastian noted that other digital platforms, such as Alphabet Inc.’s
platforms “could end up with reduced revenue shares, although Google already allows third-party stores on [the] Android [mobile platform].”
It is anticipated that Apple will file an appeal to this part of Rogers’s ruling even if she also wrote that she did not find Apple was, in this case, in violation of antitrust law.
“Given the trial record, the Court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws. While the Court finds that Apple enjoys considerable market share of over 55% and extraordinarily high profit margins, these factors alone do not show antitrust conduct,” Rogers wrote. At the end of the judgment, she found for Apple on all counts — except violation of California’s Unfair Competition Law, and only partially with respect to declaratory relief.
Each party must pay its own legal fees. The privately held Epic also has to pay Apple $12.2 million in fees for revenue Epic collected in direct payments between August
and October 2020, plus 30% of any such revenue Epic Games collected from Nov. 1, 2020, through the date of judgment.
“Today the Court has affirmed what we’ve known all along: the App Store is not in violation of antitrust law,” Apple said in a statement.
However, Rogers’s ruling appears to show that Apple was nearing an amassing of substantial, and perhaps monopoly, market power in the mobile gaming market. “[T]the Court cannot conclude that Apple’s market power reaches the status of monopoly power in the mobile gaming market,” Rogers wrote. “That said, the evidence does suggest that Apple is near the precipice of substantial market power, or monopoly power, with its considerable market share.”
Apple and its App Store have been under attack on additional fronts, as well, including a settlement earlier this month in Japan that would let so-called reader apps for news and other content sites offer alternate payment options outside of the App Store.
Dan Ives, an analyst at Wedbush Securities, has estimated that, at most, 3% or 4% of revenues are at risk for Apple over the next few years as a result of the ruling.
He suggested that the antitrust commentary from Rogers was the week’s good news for Apple. “The monopoly worries have been an overhang over the stock, and this ruling helps Apple in that way,” he said. “This is a win for Epic, Spotify
and others, but for Apple a containable risk.”