Last week the streaming music service Spotify (NYSE 🙂 filed an antitrust complaint in the EU in which Apple (NASDAQ 🙂 suppressed the innovation by giving its own music offering, Apple Music, an unfair advantage over direct competitors within its user ecosystem. Spotify says this is done in various ways, including receiving a 30% tax on any sale of third-party services through the App Store and blocking third-party access to synergies with other Apple products, such as streaming music via Spotify via Siri, Apple & # 39; s HomePod, or from the Apple Watch.
According to Daniel Ek, the CEO of Spotify, in a statement published on the company's blog:
After careful consideration, Spotify has filed a complaint with Apple against the European Commission (EC), the regulatory body responsible for maintaining fair and non-discriminatory competition. In recent years, Apple has introduced rules for the App Store that intentionally restrict choice and suppress innovation at the expense of the user experience, essentially acting as a player and referee to intentionally penalize other app developers. Having tried in vain to resolve the issues directly with Apple, we now ask the EC to take action to ensure fair competition.
This is not a nuisance. Antitrust complaints via the European Commission are serious. The regulatory body is considered to be particularly active among comparable peers of public authorities. For example, over the past two years, parent company Alphabet (NASDAQ 🙂 has received a $ 7.6 billion fine from the EC for prioritizing its own shopping service, as well as stifling competition for Google's products on its Android platform. Today, the EC even imposed a $ 1.7 billion fine on the company for anticompetitive online advertising practices.
What is the core of Spotify & # 39; s beef and how harmful can it be to Apple?
The 30% tax is a thorn in the eye of Spotify. In recent years, the pricing of music apps has found a good spot for $ 9.99 a month. Raising prices in a competitive market, as a way to generate income, is not effective in this arena because customers tend to change service providers in favor of the cheapest offer. As a result, the tax causes Apple to get a greater sales reduction for every non-Apple Music app sold.
Also, limited access to other Apple devices is a critical barrier to competition. For users, one of the greatest benefits of the Apple ecosystem is the synergy on all Apple devices. For many loyalists, this convenience has become a requirement. Not being able to sync across multiple platforms is a deal-breaker – giving Apple, for example, a competitive advantage over Spotify.
What is at stake for Apple?
Found in violation of EU antitrust legislation, carries a maximum fine of 10% of the company's annual worldwide income for the most serious cases. Apple's net revenue in 2018 was $ 265 billion, so at most the company could risk a fine of $ 26 billion if the violation turned out to be serious. That is slightly less than half of the annual income.
Perhaps more worryingly, a ruling against Apple could depress the future revenues of its current second largest segment, services.
Apple Annual Services Revenue 2014-2018
Add meaning: the company expects this division to be an important engine for future growth. In 2018, Apple brought in $ 37 billion through the service segment, including tax revenue from the App Store, as well as revenue from Apple Music. The income from the App Store is consistently stated in the company's quarterly reports as an important contribution to growth. The turnover of this group is estimated at tens of billions.
Even if the EC does not comment on this complaint, Apple must devise a better revenue model for the App Store. Spotify is not the only company that no longer wants to play according to Apple's rules. Epic Games, the creator of Fortnite and Netflix (NASDAQ 🙂 are also busy. Together with Spotify they have withdrawn from the App Store to prevent Apple from having to pay 30% tax
Bridges earlier than Moats
A quick solution to this case is unlikely. The Google case that was brought before the EC took three years to complete and that was considered short. Antitrust cases are taken seriously by the EC and careful investigation takes time.
Regarding Spotify, after the App Store now sells its services on its own website, it is unlikely that they will actually not be present in the App Store. Companies often continue to collaborate, even if their cases remain active.
Still, given what happened during the antitrust proceedings against Google, the possibility of an EU fine levied against Apple is real. Nevertheless, with $ 230 billion in the bank, Apple would hardly be decimated.
The real consideration is whether this will affect Apple's ability to generate revenue with the user base. The company has been working on its own hardware ecosystem for ten years, but the growth in unit sales is stagnating. The sales of hardware for both the iPhone and the iPad remained unchanged in 2018, while sales of Mac units fell by 5%. For this reason, many bullish theses about Apple's shares require the company to maximize revenue from its service segment while optimizing its reach to sell those services.
At the moment, revenue from Apple's service segment has slowed, but in the last quarter it was still 19% higher than $ 10 billion. So for Apple, the Spotify lawsuit is not the end of the world.
All possible branches are on the road for years. Even then, the iPhone manufacturer has no problem paying EC fines, no matter how large. Perhaps there is even an advantage for Apple if they use this as an opportunity to build bridges instead of canals for the world's biggest names in entertainment.
Apple has already built a secure empire in a murderous world. We believe that it is well positioned to navigate through all the market-based challenges it faces.
