Apple’s (AAPL) App Store may soon be competing for space on iPhones in Europe thanks to the European Union’s Digital Markets Act. The law, which goes into effect Jan. 11, 2023, with enforcement beginning in early 2024, could force Apple to allow users to install third-party app stores on their devices, circumventing Apple’s own digital storefront.
The problem, for Apple at least, is that if developers can take advantage of third-party app stores they’ll be able to bypass the 30% fees Apple charges on app sales and in-app purchases.
Without those fees, developers could charge consumers less for their apps, making Apple’s App Store less appealing overall. But according to Morgan Stanley Research’s Erik Woodring, iPhone and iPad owners are unlikely to ditch Apple’s storefront, even if it means saving some extra cash.
“From the consumer perspective, we see very little demand for alternatives to the App Store given the unmatched security, ease of use (centralization), and reliability the App Store provides,” Woodring wrote in a recent investor note.
The App Store charges developers a 30% fee for all app and in-app purchases that use Apple’s in-app payment system. Of course, the only way to make purchases via the App Store, in most cases, is via that system.
There are some exceptions to the 30% fee structure. App developers that make less than $1 million in app sales per year only pay 15% for each purchase. Subscription services, meanwhile, pay Apple 30% of the cost of the first year of a subscription. That 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 allows developers to offer their own payment options, cutting out Apple’s fees.
The E.U.’s law goes a step further, allowing customers to buy 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 surveyed in Morgan Stanley’s Fall 2022 Smartphone survey said they are extremely likely to purchase apps from a third-party website versus the app store. Apple’s option is just too convenient. What’s more, it’s a single space for consumers to make their purchases they trust.
A small hit to Apple’s bottom line
Even if Apple does lose 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.
Still, according to Woodring, if Apple lost all of its App Store revenue in Europe in 2024, an unlikely outcome, it would only take a 1% hit to its total revenue.
Things would be much worse if countries around the world adopted the E.U.’s stance, though, right? Not exactly. Woodring estimates that in such a scenario the company would lose just 2% of its total revenue.
The truth is Apple still makes the vast majority of its money from iPhone sales. In 2022, the company raked in $205.5 billion via handset sales. No other business broke $100 billion in revenue. The closest, its Services division, pulled in just $78.1 billion.
So why try to hold onto control of the App Store? Because Apple is attempting to wean itself off of its iPhone dependence, and its Services business could help the company do just that. It’s not just about the cash, though.
Apple is notoriously protective of its brand. Adding third-party app stores to the mix could expose consumers to subpar apps, which would, in turn, reflect poorly on Apple.
Still, with the E.U.’s law set to go into effect, and the potential for similar legislation in other countries and territories, the company and its shareholders can at least take solace in the fact that its bottom line should stay relatively safe. For now.
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Got a tip? Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.
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