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These 3 Companies Aren't Happy With Apple’s App Store

By Leo Sun – Jun 29, 2020 at 9:18AM

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Spotify and two other companies want Apple to justify its App Store fees.

Apple's (AAPL 0.92%) App Store hosts over 2 million apps, making it the world's second-largest app store after Alphabet's Google Play. Apple doesn't regularly disclose its App Store revenue, but CNBC analysts estimate it generated up to $50 billion in gross sales last year.

Based on Apple's 30% cut of those sales, the App Store generated $15 billion in revenue -- or 6% of its top line -- last year. It would account for roughly a third of Apple's growing Services segment revenue, which also includes Apple Pay, Apple Music, Apple Arcade, and Apple TV+.

Apple expects the expansion of its Services segment to reduce its dependence on the iPhone, which generated over half its revenue last year, and lock in more customers. However, three major companies are now questioning Apple's App Store fees.

Craig Federighi speaks at WWDC20.

Image source: Apple.

1. Spotify

Last March, Spotify (SPOT 0.12%) filed an antitrust complaint against Apple with European Union regulators, claiming the App Store fee was a "tax" which pressured it to charge higher fees than Apple Music. Spotify also accused Apple of intentionally barring its services from Siri, HomePod, and Apple Watch.

Spotify is unprofitable, and content licensing fees are one of its top expenses. Unlike Apple, which can offset Apple Music's losses with its other profitable businesses, Spotify lacks a safety net -- so eliminating the "Apple tax" could help it gain more iOS users and boost its margins.

Spotify initially tried to dodge Apple's fees by offering discounts to users who subscribe on its website instead of its mobile app. Spotify then opted out of Apple's in-app payments in 2016 and stopped signing up new users on its iOS apps. Apple subsequently reduced its cut of Spotify's subscription revenue from 30% to 15% after a subscriber's first year -- but Spotify clearly isn't satisfied with the arrangement.

2. Rakuten

Rakuten (RKUNY 1.81%), one of the largest e-commerce companies in Japan, also filed a similar complaint against Apple in the EU this March. Its e-books subsidiary Kobo, which it acquired in 2012, claims Apple's 30% cut is anti-competitive because Apple Books is a direct competitor.

Kobo claims Apple's cut makes it nearly impossible to generate profits from e-books, according to Financial Times, while Apple Books isn't shackled by comparable fees. Like Spotify, Rakuten is trying to avoid Apple's fees by encouraging users to purchase e-books on its website.

Rakuten generates most of its revenue from its core retail business, so its clash with Apple won't significantly affect its near-term growth. Nonetheless, reducing Apple's cut would boost Kobo's profits.

3. Microsoft

Microsoft (MSFT 0.66%) president Brad Smith recently voiced his concerns about dominant mobile app stores in a recent Politico interview. Smith didn't mention Apple by name, but declared app store fees need to be "justified."

Smith said there should be a "much more focused conversation about the nature of app stores, the rules that are being put in place, the prices and the tolls that are being extracted, and whether there is really a justification in antitrust law for everything that has been created."

Microsoft didn't officially back Spotify and Rakuten in their EU complaints, but its growing list of iOS apps would clearly benefit from reduced App Store fees. But Microsoft is likely cautious about provoking Apple for three reasons: it runs its own app store, it faced its own antitrust issues in the past, and Apple is still a partner that promotes Microsoft's iOS apps for the iPad Pro.

What's next for Apple?

In mid-June, the EU responded to Spotify and Rakuten's claims and formally opened two antitrust investigations into Apple.

The first probe focuses on the App Store's fees, and the second one concerns Apple Pay's exclusive use of Apple's NFC chips. The U.S. Department of Justice is also mulling a probe of Apple regarding its App Store fees, according to Politico.

Apple argues its App Store fees are justified since it covers the costs of operating the platform, promoting the apps, and allowing users to download the apps for free. It also claimed to only take a 15% cut on less than 1% of Spotify's paid subscribers.

The bottom line

The looming antitrust probes are bad news for Apple, but investors shouldn't panic. Apple can still argue its App Store fees are justified by its expenses, or lower fees for platforms it directly competes against (like Spotify and Kobo) to appease antitrust regulators. Investors should follow these developments, but they shouldn't assume these companies and regulators will torpedo Apple's fastest-growing business.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Microsoft, and Spotify Technology and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$151.81 (0.92%) $1.39
Microsoft Corporation Stock Quote
Microsoft Corporation
$239.48 (0.66%) $1.56
Spotify Stock Quote
$89.45 (0.12%) $0.11
Rakuten, Inc. Stock Quote
Rakuten, Inc.
$4.50 (1.81%) $0.08

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