Epic Games court ruling is unlikely to seriously damage Apple’s service business

Tim Cook, chief executive officer of Apple Inc., Center, arrives in the U.S. District Court in Oakland, California on Friday, May 21, 2021.

Nina Riggio | Bloomberg | Getty Images

Apple prevailed nine out of ten cases in its trial against Epic Games on Friday, but federal judge Yvonne Gonzalez Rogers has issued an injunction prohibiting Apple from preventing developers from linking in their apps to collect payments directly and Apple and its 30% revenue cut from in-app purchases.

Apple stock was down more than 3% on the news on Friday. However, Wall Street analysts and longtime Apple supporters believe the financial impact on the company will be limited.

Developers will only be able to link their apps and will not be allowed to incorporate their own alternative payment mechanisms into their apps, said one person familiar with the Apple mindset. That limits the impact, as Apple’s in-app payments will still be easier for a consumer than putting their credit card on a website.

JPMorgan analyst Samik Chatterjee said the ruling didn’t change the bank’s outlook for Apple’s services or app store deals.

“We continue to believe that consumers will use payment alternatives for expensive subscriptions and in-app purchases, which limits the headwinds for the App Store’s otherwise very broad application base,” Chatterjee wrote.

Loup Ventures founder and longtime Apple analyst Gene Munster told CNBC’s Josh Lipton that the worst-case scenario for Apple could cut Apple’s earnings by 4% over the next year, but more likely the effect would be more of a decline 1%.

“The two silver linings for investors: Firstly, growth rates will normalize again 12-18 months after the changes have been implemented,” tweeted Münster. “Second, the change will not affect Apple’s long-term potential.”

Apple regards the ruling as a win because it did not question Apple’s right to determine what software is allowed in its store and because it did not determine that Apple is a monopoly under federal or state law.

“We are very pleased with the court’s verdict and consider it a great win for Apple,” said Kate Adams, Apple’s general counsel.

But investors are closely watching Apple’s service business, which has grown rapidly in recent years, which includes online subscriptions, revenue from Apple’s App Store sales, search license revenue from Google, and AppleCare guarantees.

Services make up about 20% of Apple’s revenue, but it’s a profit engine for Apple with significantly higher margins than the hardware business. Apple had service revenue of $ 53.77 billion in fiscal 2020 with a gross margin of 66%, much higher than Apple’s 31.5% margin for Apple’s hardware business.

Apple doesn’t break down how much of its service sales come from the App Store, but it’s a big component. According to a CNBC analysis, Apple’s App Store grossed more than $ 64 billion in 2020. Sensor Tower, an app analytics company, estimates the number a little higher at $ 72 billion.

According to Sensor Tower statistics provided to CNBC, Apple has made $ 47.6 billion worldwide from mobile gaming and collected fees of approximately $ 14.3 billion.

The judge’s ruling on Friday highlighted how much of Apple’s App Store revenue comes from games, and especially from large-scale editions. Rogers said in Friday’s decision that she believes Apple’s fully charged margin on the App Store is above 72%, according to Apple documents.

Gaming app stocks rose on Friday’s news. AppLovin, Zynga, Playtika, and Roblox stocks grew in hopes these game companies can cut costs by directing users to their own payments and bypassing Apple’s cut.

Epic Games is a privately held company and its CEO Tim Sweeney said in a statement that Friday’s verdict was not a victory. Epic wants to be able to offer its own app store on iPhones.

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