Apple services business comes under pressure as App Store rule changes weigh on growth

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Apple services face pressure

Highlights

Apple reports June quarter services revenue of $30.7bn, missing analysts’ $31.4bn expectation, with gross margin at 75.6 per cent, below forecasts.
App Store commission revenue declined as court and regulatory actions in the U.S., EU, South Korea, and Brazil force Apple to allow alternative payments and app stores.
Sensor Tower reports U.S. App Store consumer spending fell 6 per cent in Q2 versus 9 per cent growth a year ago, with Apple U.S. commission revenue down 18 per cent year-to-date.

App Store changes hit services performance

As reported by Financial Times, Apple says in recent regulatory filings that it may not earn a commission at all on purchases made through alternative payment systems, a sign that antitrust-related changes are weakening a key part of its services model.

The company reports services revenue of $30.7bn in the June quarter, below analysts’ expectations of $31.4bn, while gross margin for the division is 75.6 per cent, also below forecasts cited by Visible Alpha. Apple shares fall about 9 per cent in the days following the results, and chief financial officer Kevan Parekh acknowledges that recent App Store changes have affected the business.

Apple has long relied on commission fees of as much as 30 per cent on digital purchases and subscriptions made within apps. That model is now under strain as courts and regulators force the company to loosen control over app payments and distribution.

Global antitrust action reshapes Apple’s fees outlook

A U.S. court injunction won by Epic Games last year forces Apple to let developers direct users to alternative payment methods outside the App Store without charge, allowing transactions to bypass its traditional commission structure. Sensor Tower says U.S. consumer spending through the App Store falls 6 per cent in the second quarter, compared with 9 per cent growth a year earlier, and says the slowdown is significantly affected by the ruling.

Further pressure is building outside the U.S. Regulators in the EU, South Korea and Brazil require Apple to open iPhones to alternative app stores or payment methods, while similar changes are being pursued in the UK and Australia. The EU last year fines Apple 500 million euros over alleged breaches of its Digital Markets Act, a decision Apple is appealing, while the U.S. Supreme Court agrees to review aspects of the Epic Games case after a judge finds Apple failed to comply with an earlier injunction.

Research groups also point to a broader slowdown. Global consumer spending through the App Store rises 3 per cent year on year in the June quarter, down from 13 per cent growth a year earlier, according to Sensor Tower, while Appfigures estimates Apple’s U.S. commission revenue has contracted 18 per cent so far this year. Analysts say the weaker numbers raise questions about the durability of the services business, which remains a core support for Apple’s market valuation.

In our earlier piece on premarket movers, we covered how volatility in U.S. equities was weighing on tech stocks while select chipmakers rallied on company-specific catalysts. We also noted renewed focus on Apple after an analyst upgrade and discussion around the timing risk tied to the company’s upcoming leadership transition.

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