A landmark European Union data protection law taking effect in 2024 seems poised to disrupt critical elements powering Apple’s services segment – the titanic division encompassing app store profits, subscription income, and licensing fees which have buoyed the company’s finances as device sales have plunged lately.
The looming legislation, called the Digital Markets Act (DMA), aims to limit anti-competitive behavior by big tech corporations. Some analysts suggest that the changes introduced by the law and enforced by EU authorities affecting the Apple App Store in particular may fundamentally reshape its services ecosystem.
Also read: 7 Large Tech Companies Are Listed as Gatekeepers Under the New EU’s Digital Markets Act
Currently, services represent nearly a fifth of Apple’s revenues as per its latest quarterly financial report. However, with the segment growing at over 10% annually, European regulators appear to be seeking to pull back the curtain on internal practices that are deemed unfair by both consumers and developers who create content for the company’s popular operating systems.
Apple App Store in Regulators’ Crosshairs as Scrutiny Expands
While authorities assess multiple avenues to curve Apple’s dominance, the company already confirmed that it will need to alter its app store policies to comply with DMA rules by March. Experts say that the resulting modifications allowing iPhone users to install apps from third-party stores could permanently dent Apple’s commissions.
For context, Apple (AAPL) currently takes a 30% cut on app store purchases tied to digital goods, with some exceptions already being introduced to appease increasing regulatory pressures. Gaming apps contribute over half that income.
If alternative download sources emerge or integrated payment options expand following the implementation of the stipulations set forth by the DMA, Apple risks losing billions in annual App Store revenue.
Some estimates peg App Store earnings reaching up to $7 billion per fiscal quarter – mainly thanks to video game transactions. However, new data protections forbid Apple from restricting developers from directing users to external payment channels. This loophole means that commissions could slip away to rivals.
Diminished App Store profits would endanger the steep services revenue climb enabling Apple to minimize dependence on device sales, a more cyclical business that has been affected lately by a global economic slowdown.
Tech Giants Face Widespread Scrutiny Across Multiple Regions
The fresh European scrutiny expands regulatory pressures already simmering across multiple jurisdictions. Last month in the United States, Apple and Google were confronted by an antitrust lawsuit alleging that their app store dominance harms innovation and inflates costs for consumers.
Plaintiffs in that case specifically decried restrictions on decentralized cryptocurrency integration within payment apps that hinder healthy competition. They seek financial penalties and divestment of Apple’s payments business to remedy the damages caused by years of alleged anti-competitive conduct.
Additionally, a September verdict in California centered on Fortnite maker Epic Games produced a mixed ruling. While Apple avoided monopoly charges, the presiding judge confirmed that its rules banning alternative in-app payment systems were illegal and may lead to policy changes that come closer to what the European DMA proposes. Apple continues to appeal aspects of that decision to date.
Government Probes are Advancing in the United States
Domestically, Apple faces no shortage of active regulatory inquiries either. The Department of Justice (DoJ) has investigated app store operations for some time.
If the DOJ pursues a lawsuit accusing Apple of monopoly abuse or anticompetitive practices, experts believe that the action would focus squarely on its infamously walled-off app marketplace. Once impenetrable, the fortress protecting Apple’s app ecosystem and downstream services income seems increasingly besieged.
Meanwhile, with EU legislation poised to disrupt established norms within months, authorities worldwide appear to be sensing a rare vulnerability in Apple’s competitive defenses. Every compliant adjustment with Europe’s transparency directives offers US regulators additional legal ammunition.
Counting on Customer Loyalty to Maintain Services Dominance
Of course, practical impacts from the DMA remain speculative until they are fully realized. Apple will likely lean on customer loyalty and security warnings to discourage the use of third-party app stores. But, with nearly 60% of market share in Europe’s smartphone industry, expanding choices may tempt users.
If application acquisition patterns change in Europe, US authorities would gain tangible evidence to argue that similar reforms are needed domestically. Moreover, with services driving larger and larger portions of Apple’s top line, forced app store adjustments might lead to adjustments to the company’s financial projections for future years.