Apple May Have To Lower App Store Commission Rates, Say Morgan Stanley Analysts

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Written by Dana Sanchez
App Store Commission
Apple CEO Tim Cook speaks during an event to announce new products, Oct. 30, 2018, in New York. (AP Photo/Bebeto Matthews)

Apple’s App Store is a focus of regulators in the U.S. and E.U. as the world’s most valuable tech platform approaches a $1 trillion valuation with more than 1.4 billion active devices.

Developers are suing Apple over costs associated with selling apps on the company’s app store. The suit accuses the Silicon Valley-based tech giant of monopolizing app distribution and claims the plaintiffs are forced to sell their iOS apps through the app store, CBS reported.

The company stands to gain more of its users’ time in areas such as video, augmented reality, health, autos and home. Apple may have to exit media services or lower App Store commission rates, which will reduce the company’s valuation, analysts wrote in a June 5 Morgan Stanley research update.

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Swedish music streaming service Spotify and many other third-party app developers have long complained that Apple’s 30-percent commissions on sales made through the app store are unfair and amount to a tax.

On Friday, reports emerged that the Department of Justice is preparing an antitrust probe of Google. On Monday, Reuters reported that the Department of Justice has jurisdiction over Apple’s practices as part of a wider review into the behavior of tech companies. And the Federal Trade Commission reportedly has oversight of Facebook and Amazon to see how they could be harming competition, CNBC reported.

App Store commissions a lightning rod in the glare of regulatory publicity

Apple faces a possible investigation in the European Union after Spotify
accused it of anti-competitive actions by favoring Apple Music over third-party apps. Regulators haven’t said what actions they will take if any. The U.S. Supreme Court also recently ruled that consumers can bring antitrust lawsuits against Apple related to elevated app store prices driven by Apple’s 30-percent commission rate.

And Sen. Elizabeth Warren proposes that any marketplace generating more than $25 billion in revenue per year should be considered a “platform utility” which should be prohibited from selling the company’s own products. Her proposal didn’t name Apple specifically, but Warren implied that Apple shouldn’t be allowed to both run an app store platform and offer its own products on the platform. “Either they run the platform or they play in the store. They don’t get to do both at the same time,” Warren said at SXSW in Austin, according to Morgan Stanley analysts.

This is Morgan Stanley’s worst-case scenario for Apple, according to equity analysts Katy L. Huberty and Erik W. Woodring: “Worst case, exiting media services or lowering App Store commission rate reduces valuation by $3-13, now fully reflected in our $147 bear case valuation.”

The Morgan Stanley analysts presented these points to suggest an Apple-related antitrust investigation would most likely center on the App Store:

Potential implications: Bear case valuation impact of $3-13.

The E.U. investigation takes issue with Apple’s preferential treatment of its own apps, specifically Apple Music, but that could extend to yet-to-be-launched Apple TV+ and possibly Apple News. All of Apple’s music and video businesses, including iTunes, could be at risk. Apple could take steps to level the playing field in the App Store between third-party and Apple-developed apps. An antitrust lawsuit could take years to resolve, pushing the impact on Apple’s business into the future.

Near-term view on AAPLshares.

Morgan Stanley analysts report that they continue to see catalysts for AAPL shares over the next three-to-nine months. 1) iPhone replacement cycles are peaking ahead of 5G iPhone launch in September 2020, which shares tend to price in six-to-nine months prior to launch. 2) Easier App Store compares and new service launches re-accelerating services growth. Investor feedback suggests the market is looking for clarity around trade and regulatory risks. “Shares could be range-bound between our bear and base case valuation in the very near-term,” Morgan Stanley analysts reported. “However, given a reasonable probability of outcomes on both trade and regulation that are better than our bear case analysis, we are buyers on any incremental weakness with the stock currently trading closer to our bear than base case valuation.”