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Apple Faces New Challenges In App Store

Feb. 07, 2019 10:00 AM ETApple Inc. (AAPL)73 Comments
Bluesea Research profile picture
Bluesea Research


  • Netflix has stopped allowing in-app subscription payments in iOS devices.
  • Bernstein’s Toni Sacconaghi and many other analysts have pointed to this trend as a major headwind for Apple.
  • As more customers get used to making purchases outside the App Store, we should see a significant impact on the Services revenue in the next few quarters.
  • Eventually, Apple could be forced to apply a lower commission rate across the board.
  • Investors should look at the implication of this trend as App Store is the highest gross margin business for Apple.

In the past few months, there were strong warning signs that some of the biggest apps would be moving their payments outside Apple's (NASDAQ:AAPL) App Store. Netflix (NFLX) had started experimenting with the alternative payment option in smaller markets in September. Netflix finally pulled the plug on in-app payments at the end of 2018. Although this was a question of when and not if, the speed with which Netflix was able to shift to a new payment option should be a challenge for Apple.

Fig: Top revenue apps for iOS and Google Play. Six out of the top ten revenue apps are streaming businesses. Source: Techcrunch

Apple's management has mentioned that the largest app contributes less than 0.3% of the total services revenue. However, customers will also become more comfortable in paying outside the App Store as other large apps shift to outside payment options. App Store makes up a big slice of Services revenue and contributes the majority of the profits due to its high gross margin. Analysts like Bernstein's Toni Sacconaghi have mentioned this headwind for the stock. A big dent in App Store revenue would be a significant bearish factor for Apple's stock. Investors should closely follow the scale of this headwind and the possible solutions offered by the management.

Speed of changes

I published an article on 8th September in which some of the new hurdles in App Store were mentioned. At that time, Netflix was testing with its independent payment option outside the App Store. It was clear that Netflix would sooner or later end up shifting all the customers to the independent payment system. However, what is surprising is the speed at which this alternative was launched globally to all users.

Within less than 4 months from the start of the testing, Netflix was able

This article was written by

Bluesea Research profile picture
I have worked in the technology sector for over 4 years. This included working with industry stalwarts like IBM. I have done my MBA in finance and have been covering various blue chip stocks for the past 6 years. Having hands-on knowledge in the technology sector has helped me gain valuable insights into the ups and downs of this sector and predict winners and losers more accurately.

Analyst’s 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.

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