Apple users unlikely to abandon App Store for cheaper alternatives, analyst says

Apple’s App Store (AAPL) may soon be vying for space on iPhones in Europe thanks to the European Union’s Digital Markets Act. The law, which will go into effect on January 11, 2023, with an entry into force in early 2024, could force Apple to allow users to install third-party app stores on their devices, bypassing Apple’s own digital storefront. .

The problem, at least for Apple, is that if developers can take advantage of third-party app stores, they’ll be able to circumvent Apple’s 30% fee on app sales and in-app purchases.

Without these fees, developers could charge consumers less for their apps, making Apple’s App Store less attractive overall. But according to Morgan Stanley Research’s Erik Woodring, iPhone and iPad owners are unlikely to abandon Apple’s storefront, even if it means saving some extra cash.

“From a consumer perspective, we see very little demand for alternatives to the App Store given the unparalleled security, ease of use (centralization) and reliability provided by the App Store,” wrote Woodring in a recent investor note.

The App Store charges developers a 30% fee for all app and app purchases that use Apple’s in-app payment system. Of course, the only way to make purchases through the App Store, in most cases, is through this system.

There are a few exceptions to the 30% fee structure. App developers who make less than $1 million in app sales per year only pay 15% for each purchase. Subscription services, on the other hand, pay Apple 30% of the cost of the first year of subscription. This then drops to 15% for each subsequent year.

Developers and regulators around the world have complained about Apple’s fees for years. In June, Apple introduced changes to its South Korean App Store that allow developers to offer their own payment options, reducing Apple’s fees.

EU law goes even further by allowing customers to purchase apps from third-party app stores. According to Bloomberg, Apple is currently preparing the appropriate software updates to enable third-party stores.

But Woodring says less than 30% of respondents in Morgan Stanley’s fall 2022 smartphone survey said they were extremely likely to buy apps from a third-party website compared to the App Store. Apple’s option is just too convenient. In addition, it is a unique space allowing consumers to shop with confidence.

Apple CEO Tim Cook visits the Apple Fifth Avenue store for the release of the Apple iPhone 14 line in Manhattan, New York, U.S., September 16, 2022. REUTERS/Andrew Kelly

A small blow to Apple’s bottom line

Even if Apple loses consumers to third-party app stores, it’s unlikely to make a major dent in the company’s bottom line. Europe is Apple’s second-largest market, accounting for $95.1 billion of the company’s $394.3 billion in total revenue in fiscal 2022.

Yet, according to Woodring, if Apple lost all of its App Store revenue in Europe in 2024, an unlikely outcome, it would only take 1% of its total revenue.

Things would be much worse if countries around the world adopted the EU’s position, wouldn’t they? Not exactly. Woodring estimates that in such a scenario, the company would only lose 2% of its total revenue.

The truth is that Apple still makes the vast majority of its money from iPhone sales. In 2022, the company raked in $205.5 billion from handset sales. No other company has surpassed $100 billion in revenue. The closest, its Services division, raised just $78.1 billion.

So why try to keep control of the App Store? Because Apple is trying to wean itself off its iPhone addiction, and its Services business could help it get there. It’s not just about the money, however.

Apple is notoriously protective of its brand. Adding third-party app stores to the mix could expose consumers to substandard apps, which, in turn, would reflect badly on Apple.

Still, with the EU law coming into effect and the possibility of similar legislation in other jurisdictions, the company and its shareholders can at least take comfort in the fact that its financial results are expected to remain relatively sure. For the moment.

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