Apple’s App Store is, once again, the target of government regulation. Could the new proposed bill impact the services business and, as a consequence, send Apple stock lower?
Another chapter in a long-lasting drama involving Apple (AAPL) – Get Report and government regulatory bodies is unfolding. The Open App Markets Act, introduced on August 11, would “protect developers’ rights to tell consumers about lower prices and offer competitive pricing”, among other things.
If passed, will the new legislation have a substantial impact on Apple’s App Store and its high-growth, high-margin business? And if so, could this be a negative catalyst pushing Apple stock lower in the foreseeable future?
(Read more from the Apple Maven: Here Comes The iPhone 13: One Reason Why It May Be A Success)
Some background first
US Republican and Democrat policymakers agree on very little. A notable exception is the belief that Big Tech needs to be better regulated to ensure fairness and open competition in mobile apps, social media, online search, consumer tech services and others.
The history of scrutiny over the tech monopolies and oligopolies is long. Since launching the Apple Maven channel as recently as May 2020, I have witnessed:
Now, app stores have taken center stage once again. According to the Senate bill, U.S. consumers spent nearly $33 billion in mobile app stores in 2020 alone. If the app space were controlled by one single company (it is largely controlled by two), it would be a Fortune 100 company by revenue size.
Yes, it matters a lot
To be fair, this Wednesday’s news did not lead to bearishness, as Apple stock managed to top the performance of a struggling Nasdaq index for the day. But make no mistake: any restriction on Apple’s ability to monetize its user base through the App Store can and should be considered a significant risk.
The chart below shows how Apple’s services segment has grown at a healthy average pace of 20% over the past quarters. I estimate that the App Store accounted for about one-third of Apple service revenues in fiscal 2020. Better yet, services carry better margins than Apple’s already high-margin products.
A dent on Apple’s services model could certainly be harmful to the stock. Remember, from my conversation with Wedbush’s Dan Ives, that AAPL’s valuations have expanded substantially in the past decade due, in great part, to this shift toward subscription and recurring revenues.
The Senate has introduced a bill to stimulate competition in the mobile app space. Could this be a problem for the App Store and, as a result, Apple stock?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)