Apple (NASDAQ:AAPL) and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google control the smartphone market with their iOS and Android ecosystems. Within each operating system, both Apple and Google have virtual monopolies on the system's app store, with Apple's App Store dominating iOS and Google's Play Store dominating Android.
With this dominance has come scrutiny, including potential regulatory scrutiny from U.S. senators, who questioned the two big tech companies last week over their 30% commissions on app store revenue. The chair of the antitrust subcommittee, Amy Klobuchar, argued that it is a problem when these alleged monopolies charge high commissions but also build exempt competing apps to ones listed on their respective stores.
1. Match Group
Match Group owns a portfolio of dating apps and websites, including Tinder, OkCupid, Hinge, and Match.com. It doesn't compete with any big tech companies except Facebook, which has a dating product within the app that has failed to gain much traction since its launch a few years ago. However, while it doesn't directly compete with Apple or Google, Match Group is one of the largest contributors to app store commissions. According to Match Group legal counsel Jared Sine, who was present during the government hearing about Apple and Google's dominance, the company will soon pay out $500 million a year in app store fees.
With $2.4 billion in sales last year, that $500 million payout rate equates to around 20% of Match Group's overall revenue. While one could see these high fees as a negative (it is not guaranteed they will be legislated away), they do indicate Match Group's apps have tremendous unit economics. In 2020, Match Group generated $746 million in operating income and $789 million in operating cash flow, which translates to 31% and 33% margins, respectively, for each metric, despite paying out 20% of its revenue in app store fees. If these fees are taken away, it looks like Match Group would have 50%+ profit margins, if not higher, going forward.
Spotify does not pay app store fees, as it requires users to leave the app and sign up for its premium service using a web browser. This adds friction to the sign-up process, but isn't as big of a deal as the $500 million Match Group is paying in fees. However, what is a big deal is how Spotify directly competes with the gatekeepers who control its distribution on smartphones. Apple has Apple Music and Google has YouTube Music, which both directly compete with Spotify's music streaming service.
Since Spotify has found a workaround to Apple's 30% commission, Apple doesn't allow its users to update the service directly through the app, potentially leaving a lot of users on outdated or buggy versions of Spotify. Spotify's legal counsel, who was also present at the hearings, alleged four examples of threats and retaliation from Apple over the years, including threatening to remove Spotify's app entirely and waiting months for minor updates to go through.
While these threats seem somewhat minor and hard to quantify, if the government forces Apple to lift these burdens it would have a clear benefit to Spotify's product velocity. This is especially true when you consider that Spotify is already winning against Apple Music despite this competitive disadvantage, with 155 million paying subscribers versus Apple Music's reported 72 million.
It is unclear whether these allegations against Apple and Google will actually turn into real legislation or regulation. However, if the two monopolies are forced to lower or cancel their app store fees, Match Group's operating margin could go up substantially. And if Apple and Google are forced to stop acting maliciously toward competitors, Spotify could have a much easier operating environment thereafter. Whatever ends up happening, if there is antitrust regulation enacted against Apple and Google, Spotify and Match Group stocks will likely benefit.