While there remains considerable uncertainty about how federal regulators might try to rein in large cap tech companies, one area seems ripe for reform: app stores, and more specifically, the
(AAPL) App Store and
â€™s (GOOGL) Google Play Store.
Under current practice, the stores take 30% of any revenue generated from apps and related digital goods downloaded via the stores, an approach which has turned the two platforms into huge businesses. According to App Annie, a company which tracks the industry, consumers spent just over $100 billion on apps in 2018, with the 2019 total projected at $120 billion.
Neither Apple nor Google disclose detailed data on their app store revenues, but Macquarie Research analyst Ben Schachter estimates that Appleâ€™s net revenue from its App Store in fiscal 2020 will be $17.4 billion, while Googleâ€™s take will be $8.7 billion. (Appleâ€™s higher total reflects that Google does not have an app store in China.)
Schachter, who has been covering the economics of the app stores for years, contends there are three reasons that the 30% commission the two companies earn from their stores could be headed lower: the potential for new regulation, competitive threats, and litigation. In May, a Supreme Court ruling in a decision known as the Pepper case found that consumers have the right to sue Apple on antitrust grounds relating to the App Store, opening the door to a flood of new lawsuits.
On the competitive front there have been several noteworthy developments. Epic Games, publisher of the hugely popular online game Fortnite, set up its own web-based game store last year, where it charges just a 12% commission rate.
Steam, the PC gaming platform operated by Valve, last year reduced its own commission rates on a sliding scale; commissions start at 30%, but drop to 25% on revenue over $10 million, and 20% over $50 million. Schachter notes that Epic has been a vigorous opponent to standard app store economics and has refused to distribute through the Google Play store at all, building a workaround to avoid paying Google.
A few days ago,
â€™s (MTCH) Match.com announced steps to allow Tinder users on Android to pay the dating service directly, rather than through Google Play, cutting Google out of the revenue flow in a move that should materially boost Match.comâ€™s revenue.
In a research note Wednesday, Scahchter runs the numbers on how Apple and Googleâ€”and some of the major app vendorsâ€”would be affected if their 30% commission were to be reduced. His calculations find that for every 5% reduction in the rate, Appleâ€™s earnings before interest and taxes (EBIT) would fall by 4.5%, while Googleâ€™s hit would be 3.6%. At a 20% commission rate, Apple would take a 9% EBIT hit and Google a 7% hit. If the commission rates went to zero, he says, the EBIT impact on projected fiscal 2020 results would be 19.6% for Apple, and 18% for Google.
Meanwhile, Schachter sees a huge potential boon to the companies that have effectively been paying the app stores a 30% commission on app-related revenues. For Match, he sees an EBITDA boost of 15% if commissions go to a 20% commission rateâ€”and 36% if the rate went to zero. For
(ZNGA), the lift to EBITDA is even biggerâ€”36% at a 20% rate and a whopping 87% boost at zero. For
(ATVI), parent of Candy Crush publisher King Digital, the EBITDA boost would be 27% at a 20% commission rate and 65% at zero.
Zero commissions, of course, is unlikely. Apple and Google provide valuable services, aggregating demand, providing a reliable marketplace, protecting users from viruses, security and privacy threats, handling payments, and providing promotional support in the store and elsewhere. But, Schachter says he hears from most companies that the services are still not worth 30 percentage points of revenue. Eventually, Schachter thinks, the rate will come down.
Write to Eric J. Savitz at firstname.lastname@example.org