Apple’s highly lucrative services business faces its biggest legal challenge yet, as Epic Games’ lawsuit against Apple
Apple increasingly relies on the sale of digital services to increase profitability and stabilize revenues, which have been somewhat volatile in recent years. Services accounted for around 19% of Apple’s total revenue and around 31% of gross profits in its most recent quarter (Q2 FY’21). Apple has also launched a slew of new service offerings in recent years, ranging from fitness tutorials, paid podcasts, and streaming videos. However, we believe the AppStore and third-party subscription commissions, two key targets of the Epic lawsuit, still account for a large portion of its service revenue, as they mostly include commissions (typically 15% to 30% of the value of the Epic trial). ‘purchase). . We estimate that the two service revenue streams together accounted for about $ 23 billion of Apple’s approximately $ 54 billion in service sales last year. While we are not speculating on the possible outcome of the case, it is clear that Apple’s profits would see a significant impact if it were forced to significantly cut commissions or allow app developers to bypass its. shop.
Our dashboard Apple Service Revenue Breakdown estimates revenue figures for the AppStore, Apple Music, Apple TV +, iCloud, third-party subscriptions, licensing, Apple Care, and Apple Pay.
[8/17/2020] Epic lawsuit hits Apple stock where it hurts
Last week, Epic Games sued Apple for antitrust violations, after its popular Fortnite game was pulled from the AppStore shortly after Epic let gamers bypass Apple’s in-app purchase system, thus avoiding the 30% commission on sales. Although Apple has had discussions with developers in the past, the Epic lawsuit is notable for several reasons. First, the Epic lawsuit comes at a time when tech giants, including Apple, are increasingly under scrutiny by regulators over their market power. Second, Apple is more reliant on its services business than ever, with hardware growth slowing (services profits grew 5 times faster than hardware profits in the first three quarters of fiscal 2020) , and Epic’s lawsuit targets Apple’s commissions, which is Apple’s most profitable source of income.
Apple made around $ 360 million in commissions to Fortnite over the past two years through Sensor Tower – a relative drop for Apple which generated more than $ 260 billion in revenue last year.  However, if Epic sees a favorable judgment, and if Apple is forced to reduce its commissions or change the terms of its AppStore, that is very likely to set a precedent, forcing other developers to demand similar terms.
So what could be the financial impact of Apple by reducing commissions across the board? Apple is cutting app sales and subscriptions by 30% (15% from the second year of subscription) and we estimate total commission revenue to be nearly $ 20 billion in FY’19 (on a total of approximately $ 46 billion in service revenues). If Apple cut commissions from 20% to 30%, that would reduce total commissions from around $ 7 billion to around $ 13 billion. While the revenue impact is small for Apple (less than 3% of Apple’s total revenue), the profit impact would be more pronounced since commissions are likely to be almost entirely profit. We estimate that Apple’s operating profit would be around 10% lower if commissions were reduced, given that Apple reported operating profit of around $ 64 billion in FY’19.
Now 30% commissions are actually quite common in the industry – Google Alphabet
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