Spotify’s antitrust complaint against Apple could pose a financial risk to the Silicon Valley company’s services business, according to a new note from KeyBanc Capital Markets. The complaint comes as revenue from services has become increasingly important for Apple as it looks to counteract slowing iPhone sales.
In a blog post detailing why Spotify filed the complaint, CEO Daniel Ek described Apple’s competitive advantage: it operates the App Store through which iPhone owners download and pay for apps, while also offering its own music service that directly rivals Spotify’s.
“In theory, this is fine,” he wrote. “But in Apple’s case, they continue to give themselves an unfair advantage at every turn.”
Apple takes a 30% cut of revenue from most App Store transactions, and even takes a slice from your monthly Spotify Premium fee if you subscribe via the iOS app. Ek says this makes it difficult to keep Spotify Premium priced competitively with Apple Music. Apple also requires app makers to use the App Store for all transactions, and limits the ability of developers to point users at outside payment portals.
“We believe this holds no practical purpose other than to force competitive services into higher cost structures and unfairly tax service activity on the iOS platform,” KeyBanc Capital Markets’ Andy Hargreaves and Tyler Parker said in the note published on March 13. As such, the firm believes Spotify’s complaint has merit and could “carry significant weight” in the eyes of regulators.
If Apple were forced to change its terms as a result of the complaint, it could pose a risk to the revenue Apple earns from subscriptions and in-app purchases.
“We believe the most significant financial risk to Apple would come from a forced requirement to allow first party and other third party payment processing from within apps,” the note read. “This would create competition for subscription and in-app payments that would likely drive the current 30% rate Apple collects down substantially.”
KeyBanc Capital Markets estimates that the App Store will drive 12% of Apple’s total gross profit in the 2019 fiscal year, and any major changes to the store’s communication and payment terms could “meaningfully affect” the growth rate of Apple’s services.
Repercussions stemming from the complaint could extend beyond financial risk to the App Store and impact Apple’s reputation as a brand as well, the note says. While consumers may not be concerned with the details of the complaint, it could create a prolonged period of negative Apple headlines which may in turn “negatively impact Apple’s retention rate at the margin,” according to the note.
Apple’s focus on services
Revenue from services like Apple Music and the App Store are more important than ever for the company as it seeks to grow other product areas as iPhone sales are lagging.
The company said in its January earnings report that iPhone sales in the holiday quarter declined 15% compared to the year before, while global smartphone sales have stalled. Apple’s services business achieved a milestone of $10.9 billion in revenue, marking an all-time high and a 19% increase from the prior year.
Spotify has filed its complaint just as Apple is expected to unveil new products aimed at bolstering its app and services revenue later this month. This includes a streaming video service for iPhones, iPads, and the Apple TV that would grant access to Apple original programs and shows from other media giants, according to Bloomberg. If Apple’s video streaming service proves to be a hit, it could result in 100 million subscribers over the next three to five years, Wedbush analyst Daniel Ives wrote in a note from February.
Apple is also expected to launch a paid tier of the Apple News app that’s being described by industry executives as a “Netflix for news,” according to The Wall Street Journal. It will allow users to subscribe to magazine and newspaper bundles similar to the app Texture it acquired last year, as Bloomberg reports.
But multiple reports have suggested that Apple has been struggling to come to an agreement with partners for both its video and news services. The company is rushing to secure content to offer on the service alongside its own programming according to Bloomberg, while a report from CNBC last month suggested that talks between Apple and HBO had slowed. News publishers have also been reluctant to agree to the financial terms Apple has proposed for its news service, according to The Wall Street Journal, under which it would keep half of the subscription revenue from the service.
A call to break up big tech companies
Spotify’s antitrust complaint against Apple also comes after Democratic Senator Elizabeth Warren proposed a new plan that would regulate large tech firms like Facebook, Amazon, and Google and force them to roll back or otherwise divest some of their acquisitions.
The plan would designate major tech services as “Platform Utilities” and would prevent companies from operating a marketplace and competing in that same marketplace.
“It’s got to be one or the other,” she said. “Either they run the platform or they play in the store. They don’t get to do both at the same time.”