Epic Games court ruling unlikely to seriously damage Apple’s services business

Apple prevailed on nine of 10 counts in its trial against Epic Games on Friday, but federal Judge Yvonne Gonzalez Rogers issued an injunction that prohibits Apple from preventing developers from linking out in their apps to collect payments directly and cut out Apple and its 30% take of in-app purchases.

Apple’s stock slid more than 3% on the news Friday. But Wall Street analysts and longtime Apple followers believe that the financial impact on the company will be limited.

Developers will only be able to link, and will not be permitted to build their own alternative payments mechanism into their apps, a person familiar with Apple’s thinking said. That limits the effect as Apple’s in-app payments will still be easier for a consumer than putting their credit card into a website.

JPMorgan analyst Samik Chatterjee said the ruling did not change the bank’s outlook for Apple’s services or app store businesses, noting that the decision did not recommend changes to Apple’s 30% take, and that it merely kicks off the first stage of a multistep process.

“Our view continues to be that consumers will leverage payment alternatives in the case of expensive subscriptions and in-app purchases, limiting headwinds for App Store revenues and earnings from what is an otherwise very broad base of applications,” Chatterjee wrote.

Loup Ventures founder and longtime Apple analyst Gene Munster told CNBC’s Josh Lipton that the worst-case scenario for Apple could decrease Apple’s earnings by 4% over the next year, but more likely, the effect would be closer to a 1% decrease.

“The two silver linings for investors: First, 12-18 months after the changes are implemented growth rates will return to normal,” Munster tweeted. “Second, Apple’s long-term potential is not impacted by the change.”

Apple sees the verdict as a win because it did not challenge Apple’s right to determine which software is permitted on its store, and because it did not find Apple is a monopoly under federal or state law.

“We are very pleased with the court’s ruling and we consider this a huge win for Apple,” Apple General Counsel Kate Adams said in a statement.

But investors closely watch Apple’s services business, which has grown strongly for the past few years, and includes revenue from Apple’s App Store sales in addition to online subscriptions, search licensing revenue from Google and AppleCare warranties.

Services accounts for about 20% of Apple’s revenue, but it is a profit engine for Apple, with significantly higher margins than its hardware business. Apple reported $53.77 billion in services sales in its fiscal 2020 at a 66% gross margin, much higher than the 31.5% margin for Apple’s hardware business.

Apple doesn’t break down how much of its services sales come from the App Store, but it’s a big component. Apple’s App Store grossed more than $64 billion in 2020, according to a CNBC analysis. Sensor Tower, an app analytics firm, places the number slightly higher, at $72 billion.

Worldwide, Apple grossed $47.6 billion from mobile games, collecting fees of about $14.3 billion, according to Sensor Tower statistics provided to CNBC.

The judge’s ruling on Friday highlighted how much of Apple’s App Store revenue comes from games and in particular, big spenders. Rogers said in Friday’s ruling she believed Apple’s fully burdened margin on the App Store was over 72%, based on Apple documents.

Gaming app stocks soared on Friday’s news. Shares of AppLovin, Zynga, Playtika and Roblox climbed on hopes that those gaming companies can reduce costs by directing users to their own payments, bypassing Apple’s cut.

Epic Games is a private company and its CEO Tim Sweeney said in a statement that Friday’s ruling wasn’t a win. Epic wants to be permitted to offer its own app store on iPhones.