Apple Inc. (NASDAQ: AAPL) recognized a few years ago that iPhone owners were keeping their phones longer. Instead of wailing that someone had moved its cheese, Apple decided to follow its customers and provide services for those phones that were already in people’s hands.
For Apple, this meant software services like Apple Music and TV+, as well as repair services for the older phones. In other words, taking care of a customer’s presence in the Apple ecosystem. In the December quarter, Apple’s services revenue rose 24% year over year to $15.7 billion, more than double its total as recently as the fourth quarter of 2017.
Analyst Amit Daryanani at Evercore ISI believes that Apple can grow its services revenue at a compounded rate of 19% through the company’s September 2024 fiscal-year end. If that happens, Apple’s services revenue will hit $100 billion for the year and represent 30% of the company’s annual revenue and 45% of its gross profit.
The consensus Wall Street estimate for the current quarter is that services revenue will decline by 16%, but Daryanani said in a research note cited in Barron’s that strength in app downloads indicates “an increasing likelihood of upside to consensus estimates.”
Daryanani estimates that Apple’s developer revenue from App Store downloads totaled $4.4 billion in the December quarter and rose by 30% in both January and February. That revenue stream is under attack, however, both in the United States and in Europe.
The U.K.’s Competition and Markets Authority has begun looking at whether Apple’s terms for its apps developers are anti-competitive. The investigation follows allegations made last year by Epic Games, makers of Fortnite, and in 2019 by Spotify, challenging Apple’s 30% fee for products sold through the App Store and the requirement that all in-app sales be conducted through Apple Pay.
In a related instance, Arizona’s state House of Representatives on Wednesday approved legislation that would prevent Apple’s App Store (and Google Play) from requiring apps developers to use their payment system. The vote was 31 to 29 in favor of the bill that will now go to the state senate for consideration. If the senate approves the measure, Governor Doug Ducey will have to sign it before it becomes law.
Under the legislation, app stores would be prohibited from requiring developers based in Arizona to use their preferred payment system. One effect of the legislation would be to make Arizona a much friendlier state for app developers. Of course, the legislation, if passed, would have to withstand an almost certain challenge from Apple and Google as a violation of federal laws related to interstate commerce.
App developers argue that Apple and Google are effectively forcing them to pay a 30% tax for using the companies’ app stores. Apple has countered that the App Store was built by Apple and provides developers with “an enormous amount of value” and that the 30% commission developers pay “reflects that value.”
A kindred effort to allow developers to use other payment systems recently failed in North Dakota, but Georgia, Hawaii and Minnesota legislatures are currently considering similar legislation.
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