Apple's App Store Empire Is Finally Starting to Crack

Apple's (AAPL -0.35%) walled garden is finally starting to show cracks. Legal challenges and regulatory threats are starting to put Apple's 30% App Store commissions in jeopardy. 

In this episode of "The Five," recorded on Sept. 3, Fool contributors Brian Withers, Jeremy Bowman, and Toby Bordelon discuss the impact of the new App Store policies, and what this means for the tech giant over the longer term.

Brian Withers: New York Times article says that on Wednesday, Apple said it was adjusting its App Store policies through -- I don't know whether this is pressure from lawsuits, or antitrust, or whatever -- but, Apple is changing its rules for its App Store and will allow certain applications to do more business directly with customers. Things like Netflix and Spotify will be allowed to include a link with their apps. This is so funny. It's like Apple is bending over backwards. They're [laughs] allowing these companies to put a link in their app to allow users to directly set up or manage their accounts and do things like, have subscription fees taken directly through the company and avoid the 30 percent charge through the App Store. Question. For Apple shareholders, the services business is the future of Apple. I've seen some really neat articles on the fool.com website that talk about Apple's iPhone sales are declining, but it shouldn't matter. Well, that's true because services revenue is just a huge portion of Apple's business and it's only getting bigger. But is this a sell signal for Apple shareholders? Are you worried about this change for Apple? Let's do this in two parts. Let's go for that first. Toby, is this a sell?

Toby Bordelon: It is not a sell.

Withers: I read your lips. [laughs]

Bordelon: For Apple. Absolutely not. I wouldn't sell the news. I want to say this is transformative for the industry in many ways. You're starting to see the walled garden has come down a little bit, I think. To some degree, that means less revenue. It absolutely means less revenue for Apple. Less revenue, less stickiness perhaps. Let's not pretend that they are doing this for any other reason than because they were forced to. [laughs] I think we got to get that out there. I think it's Japan actually. They are required to do this as part of a settlement with regulators, and I believe it's Japan. What they decided was they just going to do it everywhere. They put the spin on, well, it's simpler and easier and better for our customers, fine. But this is going to be the minimum, I think, they would have had to do when you start looking at potential issues in the EU, even here in the United States. This was inevitable and it's coming and was going to come everywhere. Trying to get ahead of it by saying, I think to stave off some of these potential antitrust investigations by just saying, we fixed that problem. You don't have to look at anymore. Nothing to see here, it's all good. We'll see if that actually works. But obviously that means because they were forced to. But I wouldn't sell. I think this is not a reason to get rid of company. They're a solid company. They're fantastic company. I don't remember. We looked at some of these big tech companies before in terms of their revenue mix. I don't quite remember what percentage of Apples came from where, but they still make a lot of money on selling stuff, selling ipads, selling iphones.

Withers: Most of them are.

Bordelon: The App Store revenue while substantial, I don't believe that was the majority, it's elsewhere that they're making most of their money. You have that there?

Withers: Last quarter. The quarter ended in June. They had $81 billion of sales and 64 billion was from products.

Bordelon: You see there. First of all, 81 billion.

Withers: [laughs] That's only 90 days. That's almost a billion dollars a day.

Bordelon: I feel like if you're going to sell Apple on this news, you're missing the big picture with the company, to the tune of 81 billion a quarter. Maybe at 75 billion eventually because of this. But no, they're going to find other ways to make that back. They're going to sell more stuff, many more stuff. That's my thought on Apple.

Withers: We'll hold the second part. Let's go to Jeremy. We still have 19 minutes, so we've got a ton of time to talk about this. Is this a sell signal for Apple shareholders? Should Apple shareholders be worried?

Bowman: I think I agree with Toby that I wouldn't sell on this news, but I think this is really something worth following because there's this debate about this big tech monopoly, Apple and Facebook, all these companies, Google. I think that question is more of a spectrum rather than a black and white answer. First of all, we talked about Facebook being a utility. Let's talk about phones. You want a phone, there's only two places you can go at least as far as the operating, and they're both huge companies. You got Apple and you've got Google -- or Alphabet. I have an iPhone, either you got one or the other. The fact that Apple has managed to have this really 30 percent tax on any developer, small, big, any kind of company. If you're Netflix, what company doesn't have a mobile app in this day and age? This is probably Apple's highest margin, I would think because there's basically no (cost), I don't know what the cost is to put your app. It's like Apple owns the world's most valuable real estate and you're paying to park your car there.

Withers: [laughs] Exactly.

Bowman: They don't have to do anything. I think it's like a credit card business a little bit, but credit card fees are 2-3 percent, that seems to be reasonable.

Withers: Yeah, the margin on the services businesses is 70 percent.

Bowman: Yeah, that's incredible. I think this pressure has been building for a while. Netflix made this move a few years ago where they're like, look, we're not going to give Apple anymore money. You can download our app but if you want our subscription, you got to come to our website. I don't know how much they've saved or what, but I think it hasn't slowed them down. I think it was a smart move and one they probably should have done earlier. I'm not sure about Spotify, but those are obviously two huge subscription businesses in the App Store. I think, and this is part of that larger narrative about the antitrust threat or regulatory threat that's been creeping up on Apple and Facebook and Google and on all of them. I think Apple might be doing this to get ahead a little bit. There is a lawsuit with Epic Games also, which is the Fortnite maker, which I think people are waiting the decision on that soon. I think there's a lot of pushback against this 30 percent charge. I think that gravy, that easy revenue stream for Apple's might start to maybe not shrink, but it's not going to be as easy going forward.

Withers: I'm with you guys. It should not be worrisome at all to Apple shareholders. This noise is way died down. A couple of years ago, ad blocking software came out. I use ad-blocking software because it just makes my life easier. Everybody was like, "Oh, no, Google's revenue stream, what's going to happen?" Nothing. [laughs] Google's advertising business is way bigger than it was. Ad blocking software is still used quite a bit around the Internet. Yes, this is definitely not a sell for Apple shareholders by any stretch of the imagination.