Category: AAPL

Apple CEO Tim Cook. Evan Agostini/Invision/AP

Back in August, Apple (AAPL) revoked Epic Games’ license to list apps on its App Store after the latter tried to bypass Apple’s in-game payment system. The Fortnite creators argued that Apple’s 30% cut was unfair, as Apple has created a monopoly on its devices and were hurting the consumer as a result. This was further established by recent moves by Apple to block any other platforms from offering games or apps on its devices. When Epic dropped the price of its in-game currency by 20%, it did so by routing around Apple’s in-store purchases and dodging the 30% purchase fee that the company mandates for its app developers. After this action, it did not take long for Apple to remove Fortnite from its App Store. Following this, Epic Games immediately launched a lawsuit against Apple, alleging that the latter’s practices violated the Sherman Act and California’s Cartwright Act. The company didn’t seek financial damages, but rather a ramification for the problem that it deemed to be inherent in Apple’s business model. On November 18, Apple announced that it would be cutting its App Store tax in half for smaller developers.

What’s in Store for the Future?

Apple’s new App Store regulations will become effective on January 1st, allowing smaller developers to operate with a slight advantage over their more established peers. This will tie in to Apple’s “App Store Small Business Program,” which aims to unburden small businesses that may have been affected by the pandemic. It appears that this program will now continue as a means to promote greater app diversity by allowing smaller developers to gain a slight advantage over their larger competitors. With this in mind, it is seeming increasingly unlikely that Apple will lose its suit against Epic Games. With details released from preliminary hearings, it seems even more unlikely that Apple will face a form of punishment, as Judge Rogers’ interjections point towards the multi-device support available on the iOS variant of Fortnite as an existing means to bypass Apple’s in-game payment tax.

(Source: TechCrunch)

American companies face far more scrutiny from Europe than they usually do in their native land. Taking Amazon (AMZN) as an example of this, large American firms are far from immune overseas, and instead, tend to be the exact opposite. Back in June, the European Commission launched a probe into Apple’s App Store practices after Spotify (SPOT) and an e-book publisher launched complaints. However, following Apple’s decision to cut rates for small developers, the EU confirmed that its investigation remains ongoing. In Europe, the company will be investigated on two restrictions that it imposes on users of its devices:

1. The mandatory use of Apple’s own proprietary in-app purchase system (“IAP”) for the distribution of paid digital content. Apple charges app developers a 30% commission on all subscription fees through IAP.

2. Restrictions on the ability of developers to inform users of alternative purchasing possibilities outside of apps. While Apple allows users to consume content such as music, e-books and audiobooks purchased elsewhere (e.g., on the website of the app developer) also in the app, its rules prevent developers from informing users about such purchasing possibilities, which are usually cheaper.

Both of these have a clear correlation with what Epic Games raised an issue with, as the IAP referred to above is the App Store, and the second issue addresses what Epic Games tried to do with its in-game currency, which ultimately got it banned. The EU’s decision to clarify its intent to continue its investigation is not a positive sign for Apple, but this doesn’t mean the company will be penalized. What I anticipate to happen is Apple will be forced to allow third-party payment systems within apps sold on the App Store, but will be allowed to continue to implement its proprietary IAP. Essentially, the company will be found guilty on its second investigation, but not the first. This is because, as Spotify has demonstrated, its inability to lower the price of Spotify Premium to compete with Apple Music is a clear violation of Europe’s antitrust laws. Additionally, going back to Amazon, Europe has a clear precedent of harsher punishments for big tech companies and has no reason not to continue this with Apple. It also seems logical that the EU will determine that Apple devices running off of the proprietary IAP is the most efficient way for the devices to operate, as Huawei’s app store fiasco demonstrates that introducing new IAP’s is awfully inefficient.

Why This Doesn’t Matter

Looking at why this new revelation doesn’t matter too much has to do with how Apple defines a “small developer.” For Apple, a small developer is one that makes less than $1 million per year, based on 2020 total revenue. If this doesn’t sound like much, that’s because it’s not. Individually, these developers contribute very little to Apple’s total revenue, and the halving of revenue gained from each of them is likely to be very little. Morgan Stanley’s analysis has gone so far as to determine that this will correlate to a mere $.03 drop in EPS for the year 2021.

(Source: The Verge)

Apple’s operations in Europe carry far less weight, meaning the company has much less to worry about in the overseas market. Europe consisted of 23% of Apple’s total 2019 sales, while services consisted of 18% of its total sales. Essentially, even if Apple were to completely lose its grasp on the App Store in Europe, this would only account for 4% of its total revenue. This isn’t insignificant, but due to my anticipated resolution with the EU, the actual losses would likely end up being around half of this. Looking at both of these ramifications, the overall losses that will be incurred by Apple are rather negligible, especially when put into context of the company’s greater operations.

Investor Relevance

Quite frankly, this article serves mostly as a reassurance to investors in the company that may have been concerned about recent probes into Apple’s operations. In its recent 10-K filing, Apple stated, “If the rate of the commission that the Company retains on such sales is reduced, or if it is otherwise narrowed in scope or eliminated, the Company’s financial condition and operating results could be materially adversely affected.” This, understandably, raised some concerns as the company faced its initial probes by the US government and Europe. However, as I’ve outlined, these concerns no longer carry as much weight.

As such, those currently invested in Apple shouldn’t concern themselves too much with these probes into the company’s app policies and should feel confident in their holdings. Short-sellers of the company may wish to reevaluate their philosophies around their thesis if recent probes have had anything to do with this. As a dominant force in the American tech industry, Apple will maintain its grip on its digital content marketplace and continue to profit off of the content downloaded to its devices. As such, those who may not yet be invested in Apple could consider taking a long position, as the company’s services segment will likely only continue to grow as it sees a greater user base in the coming years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Tim Cook in Cupertino in September 2019. Christoph Dernbach/picture alliance via Getty Images

Earlier today, Apple announced it will reduce the App Store commissions for smaller businesses so that developers earning less than $1 million per year pay a 15% commission on in-app purchases, rather than the standard 30% commission.

Tim Sweeney, founder of Epic Games, says the move — an apparent reaction to current investigations into Apple by Congress, the European Union, the Justice Department and the Federal Trade Commission on antitrust grounds — doesn’t go nearly far enough. He told the Wall Street Journal that Apple is merely “hoping to remove enough critics that they can get away with their blockade on competition and 30% tax on most in-app purchases. But consumers will still pay inflated prices marked up by the Apple tax.”

Sweeney — whose company has been embroiled in a battle since launched a direct-payment system in its popular “Fortnite” game to bypass Apple’s fees — went even further today in conversation with Dealbook during a two-day event.

Asked about Epic’s fight with the tech giant — which began in August with its payment system, which led to Apple kicking Fornite off the App Store, which led to Epic filing a civil lawsuit against Apple in the U.S. and more newly to begin legal proceedings against Apple in Australia using the same argument that Apple is acting monopolistically — Sweeney didn’t mince words. He even likened Epic’s ongoing campaign to the fight for civil rights in the U.S.

Said Sweeney:  It’s everybody’s duty to fight. It’s not just an option that somebody’s lawyers might decide, but it’s actually our duty to fight that. If we had adhered to all of Apple’s terms and, you know, taken their 30% payment processing fees and passed the cost along to our customers, then that would be Epic colluding with Apple to restrain competition on iOS and to inflate prices for consumers. So going along with Apple’s agreement is what is wrong. And that’s why Epic mounted a challenge to this, and you know you can hear of any, and [inaudible] to civil rights fights, where there were actual laws on the books, and the laws were wrong. And people disobeyed them, and it was not wrong to disobey them because to go along with them would be collusion to make them status quo.”

While the analogy undoubtedly prompted some eye rolls by attendees, Apple’s announcement today suggests that Epic, which has itself evolving into a powerful and lucrative platform — one valued at $17.3 billion during in August following a $1.78 billion funding deal — is moving the needle.

The question is where it all ends. Interviewer Andrew Ross Sorkin noted that Epic has a price in its own app store, asking if there is any “fair price” in Sweeney’s mind that Apple could charge.

Sweeney noted that Epic itself pays 2% to 3% in transaction costs in developing countries, another 1% for payments support and “maybe 1%” of revenue to cover its bandwidth costs and suggested that an 8% Apple tax, as it has come to be called, might be acceptable in exchange for the service it provides to developers.

In fairness to Apple, Sorkin also observed that similar to Apple, Sweeney talks about “Fortnite” as a platform, one that is “right now not open; there’s not a competitive marketplace where others can effectively develop on top of [the] platform [to] create their own in app purchases right now.” He asked if that might be changing.

Sweeney said the company is “moving in that direction.” Pointing to Fortnite Creative, a mode in Fortnite allows users to freely create content,  he said that “tens of millions of creators are sharing their content with their friends and with the general public, and there’s a little bit of a business model there. But it’s in the very early stages of development.”

Apple previously said that it would tighten its own rules around third-party data usage.

Alastair Pike/Agence France-Presse/Getty Images

Apple faces two strategic privacy complaints in Europe by Max Schrems, a digital activist who has successfully taken on Facebook’s user data practices.

Schrems’ Vienna-based nonprofit Noyb (as in “none of your business”) filed privacy complaints with German and Spanish regulators, alleging that Apple AAPL, +0.70% tracks users without their consent, in violation of European Union law.

Apple has updated a documentation page detailing the company’s next steps to prevent last week’s Gatekeeper bug from happening again, as Rene Ritchie spotted. The company plans to implement the fixes over the next year.

Apple had a difficult launch day last week. The company released macOS Big Sur, a major update for macOS. Apple then suffered from server-side issues.

Third-party apps failed to launch as your Mac couldn’t check the developer certificate of the app. That feature, called Gatekeeper, makes sure that you didn’t download a malware app that disguises itself as a legit app. If the certificate doesn’t match, macOS prevents the app launch.

Many have been concerned about the privacy implications of the security feature. Does Apple log every app you launch on your Mac to gain competitive insights on app usage?

It turns out it’s easy to answer that question as the server doesn’t mandate encryption. Jacopo Jannone intercepted an unencrypted network request and found out that Apple is not secretly spying on you. Gatekeeper really does what it says it does.

“We have never combined data from these checks with information about Apple users or their devices. We do not use data from these checks to learn what individual users are launching or running on their devices,” the company wrote.

But Apple is going one step further and communicating on the company’s next steps. The company has stopped logging IP addresses on its servers since last week. It doesn’t have to store this data for Gatekeeper.

“These security checks have never included the user’s Apple ID or the identity of their device. To further protect privacy, we have stopped logging IP addresses associated with Developer ID certificate checks, and we will ensure that any collected IP addresses are removed from logs” Apple writes.

Finally, Apple is overhauling the design of the network request and adding a user-facing opt-out option.

“In addition, over the the next year we will introduce several changes to our security checks:

• A new encrypted protocol for Developer ID certificate revocation checks
• Strong protections against server failure
• A new preference for users to opt out of these security protections”

BERLIN (Reuters) – A group led by privacy activist Max Schrems on Monday filed complaints with German and Spanish data protection authorities over Apple’s AAPL.O online tracking tool, alleging that it allows iPhones to store users’ data without their consent in breach of European law.

It is the first such major action against the U.S. technology group in regards to European Union privacy rules.

Apple says it provides users with a superior level of privacy protection. The company had announced it would further tighten its rules with the launch of its iOS 14 operating system this autumn but in September said it would delay the plan until early next year.

The complaints by digital rights group Noyb were brought against Apple’s use of a tracking code that is automatically generated on every iPhone when it is set up, the so-called Identifier for Advertisers (IDFA).

The code, stored on the device, allows Apple and third parties to track a user’s online behaviour and consumption preferences – vital for the likes of Facebook FB.O to be able to send targeted ads that will interest the user.

“Apple places codes that are comparable to a cookie in its phones without any consent by the user. This is a clear breach of European Union privacy laws,” said Noyb lawyer Stefano Rossetti.

Rosetti referred to the EU’s e-Privacy Directive, which requires a user’s prior consent to the installation and use of such information.

Apple’s planned new rules would not change this as they would restrict third-party access but not Apple’s.

Apple accounts for one in every four smartphones sold in Europe, according to Counterpoint Research.

The claims were made on behalf of an individual German and Spanish consumers and handed to the Spanish data protection authority and its counterpart in Berlin, said Noyb, a privacy advocacy group led by Austrian Schrems that has successfully fought two landmark trials against Facebook.

In Germany, unlike Spain, each federal state has its own data protection authority.

Rossetti said the action was not about high fines but rather aimed at establishing a clear principle whereby “tracking must be the exception, not the rule”.

“The IDFA should not only be restricted, but permanently deleted,” he said.