Recently we wrote about how Apple (APPL US) have been facing some headwinds. Cutting its forecasts for latest flagship phones. The company stopped reporting unit sales for IPhones. The markets found all these developments this quite worrisome. Have Apple IPhone sales have reached saturation levels? For example average selling price of an IPhone is around $800, compared to $170 for all other smartphones. Even though Apple only has roughly 15% of the global market of smartphones it has over 60% of all the profits generated. Investors have been concerned that this saturation of IPhone sales would hit the company’s financials.
Apple and some bullish investors have argued that even though IPhone sales will eventually stop growing, Apple is much more than a just Smartphone company. Apple is more and more moving towards becoming a service company. In 2017 roughly 13-14% of total sales for Apple came from their Service unit. One important part of this service unit is Apple’s App Store. In Q3 2018 sales were over $12bn growing over 20% year on year. It is grew faster than Google’s (GOOG US) Google Play App-store. SensorTower writes;
Global consumer spending on the App Store and Google Play totaled $18.2 billion during the third quarter, Sensor Tower Store Intelligence data reveals. This marks a 22.7 percent increase over the $14.8 billion we estimate was spent on both stores during the year-ago quarter. At the same time, Apple has expanded its commanding lead in app monetization over Google, with the App Store earning nearly 94 percent more than Google Play during the quarter, the widest revenue disparity since at least 2014 between the two platforms.
Some have argued that Apple have been able sell its phones for such high prices due to the whole Apple “ecosystem”. Users get dependent on various Apple services so they feel almost forced to buy IPhones. One integral part of this cash-machine might be under threat from the Supreme Court. Github explains;
Since 2011, the tech giant has been fighting antitrust litigation that claims its App Store policies amount to an unfair monopoly. Those who were present at today’s hearing say the case’s outcome isn’t looking great for Apple.
The Case of Pepper vs. Apple, an App developer Robert Pepper argues that Apple, by forcing iOS users to get their Apps from the App Store and charging developers 30% to sell on their site stifles competition. In addition forces consumers to pay higher prices. In essence arguing Apple and its App Store operates like a monopoly. It appears that most of the Supreme Court justices were open to letting the suit proceed. Apple Insider notes;
Justices Stephen Breyer, Elena Kagan, and Sonia Sotomayor questioned the logic behind the order of purchasing, with Kagan noting that every stage of a consumer’s purchase goes though Apple’s App Store. “From my perspective, I’ve just engaged in a one-step transaction with Apple,” Kagan suggests.
For Justice Samuel Alito and Neil Gorsuch, the two seemed to suggest a reexamination of Illinois Brick may be in order, with Alito noting the “tens of thousands” of app developers who have not filed similar lawsuits against Apple
Four liberal and three conservative justices are skeptical against Apple’s claims that there is no monopoly and lean towards allowing the suit move forward.
From an investor perspective if the plaintiffs wins it would be a big for Apple. One important leg of Apple’s growth story post stalling IPhone sales would be taken away. Ben Thompson of Stratechery sums it up well;
It seems incredibly worrisome to me anytime any company predicates its growth story on rent-seeking: it’s not that the growth isn’t real, but rather that the pursuit is corrosive on whatever it was that made the company great in the first place. That is a particularly large concern for Apple: the company has always succeeded by being the best; how does the company maintain that edge when its executives are more concerned with harvesting profits from other companies’ innovations?
For Apple who just lost its spot as the world’s most valuable company to Microsoft (MSFT US), having their main profit driver stalling, and having other growth segments face legal challenges could in the long-term be worrisome. To sum it up, consumers are less inclined to pay for expensive smartphones. U.S-China trade-war would further increase smartphone price, and now the Supreme Court threatening to take away their golden goose.