Antitrust attacks start to bite into Apple’s $100bn services business

Apple has acknowledged for the first time that regulatory changes forcing it to loosen control of its App Store are weighing on its more than $100bn services business, a rare concession that antitrust action is beginning to dent one of the company’s most profitable divisions.

The iPhone maker reported services revenue and margins below Wall Street expectations this month and warned in its latest regulatory filings that it “may not earn a commission at all” on purchases made through alternative payment systems.

The disclosure is the clearest sign yet that years of court rulings and regulatory intervention in the US, Europe and elsewhere are starting to erode the commission fees that underpin Apple’s high-margin services business.

New research backs up that trend. Sensor Tower found US consumer spending through the App Store fell 6 per cent in the second quarter, compared with 9 per cent growth a year earlier, while Appfigures estimated that Apple’s US commission revenue has contracted 18 per cent so far this year.

UBS analyst David Vogt described slowing App Store growth as a “concern”, while Bank of America’s Wamsi Mohan said services revenue of $30.7bn was a record but still “somewhat weaker than we expected”.

Apple had attributed the division’s performance to several factors, including foreign exchange movements. But chief financial officer Kevan Parekh also acknowledged that recent changes to the App Store had hit the business.

The company reported services revenue of $30.7bn in the June quarter, below analysts’ expectations of $31.4bn, while the division’s gross margin of 75.6 per cent also missed forecasts, according to Visible Alpha. Apple shares fell about 9 per cent in the days following the results.

Courts and regulators around the world have forced Apple to loosen its control over app payments and distribution, undermining the commission fees of up to 30 per cent that it charges on digital purchases and subscriptions made within apps.

A US court injunction won by Epic Games last year forced Apple to allow app developers to direct users to alternative payment methods outside the App Store without charge, bypassing its traditional commission.

Sensor Tower said the US slowdown reflected how consumer spending inside the App Store had been “significantly impacted” by the ruling.

Global consumer spending through the App Store rose just 3 per cent year on year in the June quarter, down from 13 per cent growth a year earlier, according to Sensor Tower. The research group said weaker consumer spending and macroeconomic uncertainty may also have weighed on demand.

Separate research from Appfigures found App Store revenue was also contracting in Brazil and Japan after both countries introduced new rules in recent months.

Apple argues its tight control of iPhone apps is necessary to protect users. But regulators in the EU, South Korea and Brazil have required the company to open iPhones to alternative app stores or payment methods, while similar changes are being pursued in the UK and Australia.

The EU last year fined Apple €500mn over alleged breaches of its Digital Markets Act, a decision the company is appealing against. In the US, the Supreme Court has agreed to review aspects of the Epic Games case after a judge found Apple had failed to comply with an earlier injunction governing App Store payment rules.

“It would make sense that it starts to show up in the numbers . . . we were surprised that it really wasn’t traceable before,” said Nicholas Rodelli, director of legal research at Washington Analysis.

“Apple’s premium valuation is predicated on services, and the App Store is really the crown jewel of that,” he added. “We think the market is going to reprice the durability of the services business take rate.”

Apple declined to comment.

Data visualisation by Clara Murray