Key Highlights

  • Apple has acknowledged for the first time that regulatory changes forcing it to loosen App Store control are weighing on its more than $100 billion services business
  • The company reported services Revenue and margins below Wall Street expectations, with its finance chief confirming recent App Store rule changes had hit the business
  • Independent research found US consumer spending through the App Store fell in the most recent quarter, while Apple's US commission revenue has contracted sharply this year
  • Courts and regulators in the US, EU, South Korea and Brazil have forced Apple to loosen control over app payments and distribution, undermining commissions of up to 30%

Apple Confirms Regulatory Pressure Is Denting Services Growth

Apple (NASDAQ:AAPL) has acknowledged for the first time that regulatory changes forcing it to loosen control of its App Store are weighing on its more than $100 billion services business, a rare concession that antitrust action is beginning to affect one of the company's most profitable divisions. The company reported services revenue and margins below Wall Street expectations this quarter and warned in regulatory filings that it may not earn a commission at all on purchases made through alternative payment systems.

The company reported services revenue of $30.7 billion in the June quarter, below analyst expectations of $31.4 billion, while the division's gross Margin of 75.6% also missed forecasts. Apple shares fell roughly 9% in the days following the results. Apple had attributed the division's performance to several factors, including foreign exchange movements, but the company's chief financial officer also acknowledged that recent changes to the App Store had affected the business.

Independent Research Confirms Slowing US App Store Spending

New research backs up the trend. One data provider found that US consumer spending through the App Store fell 6% in the second quarter, compared with 9% growth a year earlier, while another estimated that Apple's US commission revenue has contracted 18% so far this year. The slowdown reflects how consumer spending inside the App Store has been significantly affected by a US court injunction won by Epic Games last year, which forced Apple to allow developers to direct users to alternative payment methods outside the App Store without charge, bypassing its traditional commission.

Global consumer spending through the App Store rose just 3% year on year in the June quarter, down from 13% growth a year earlier, according to the same research provider, which said weaker consumer spending and macroeconomic uncertainty may also have weighed on demand. Separate research found App Store revenue was also contracting in Brazil and Japan after both countries introduced new rules in recent months.

Global Regulators Continue to Pressure App Store Model

Courts and regulators around the world have forced Apple to loosen its control over app payments and distribution, undermining the commission fees of up to 30% that it charges on digital purchases and subscriptions made within apps. Apple argues its tight control of iPhone apps is necessary to protect users, but regulators in the EU, South Korea and Brazil have required the company to open iPhones to alternative app stores or payment methods, while similar changes are being pursued in the UK and Australia.

The EU fined Apple €500 million last year over alleged breaches of its Digital Markets Act, a decision the company is appealing. In the US, the Supreme Court has agreed to review aspects of the Epic Games case after a judge found Apple had failed to comply with an earlier injunction governing App Store payment rules. An analyst at a legal research firm said the market is likely to reprice the durability of the services business, given how central the App Store has been to Apple's premium valuation.