Apple’s App Store case: What investors need to know

Apple lost its case against Epic Games … kind of.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

Apple (NASDAQ: AAPL) has been locked in a battle with Epic Games, the creator of the popular game Fortnight, since last August. Epic tried to implement a way for users to pay for in-game purchases without going through Apple's App Store.

Apple didn't like that idea.

But in a court ruling earlier this month, U.S. District Judge Yvonne Gonzalez Rogers determined the tech giant must allow other avenues of payment for in-app purchases. While that's bad news for Apple and its investors, the ruling still had plenty of good news too.

Here's what investors need to know.

The bad news first

The judge's ruling will force Apple to allow alternative payment options for in-app purchases. 

Apple previously made a concession to allow certain apps to provide users with a link to pay for a subscription outside of Apple's ecosystem. That rule only applied to what Apple called "reader apps," which allow users to access subscription content like video, music, or news. The court ruling will force the company to apply that same mechanism to all apps in the United States.

That's a big deal, because Apple derives a significant amount of its App Store revenue from in-app game purchases in the U.S., which were previously restricted to Apple's payment system. App Store users in the U.S. spent $12.6 billion on mobile games last year between premium downloads and in-app purchases, according to data from Sensor Tower. Apple kept about $3.8 billion of that total.

There's also potential for the ruling to influence regulations and lawmakers around the world. South Korea and Japan have already made rulings affecting Apple's App Store policies in recent weeks. In fact, a Japan Fair Trade Commission ruling was the impetus behind the change for reader apps.

For now, however, the ruling may result in a loss of revenue between $1 billion and $4 billion per year, according to Loup Ventures analyst Gene Munster. For a company with annual operating income approaching $100 billion, that's a manageable setback.

The good news

Judge Gonzalez Rogers didn't find Apple to be a monopolist under either California state or federal law. As such, the company won't be required to allow third-party app stores on iOS. It also means Apple can restrict developers from inserting their own payment processing mechanisms within their apps. In fact, the judge ordered Epic to pay Apple damages -- 30% of revenue collected -- for using the payment mechanism that got it booted from the App Store.

Furthermore, the ruling also makes it harder for the Department of Justice to make the claim that Apple's a monopolist that excludes market entrants and extracts monopolist profits. It won't, however, prevent lawmakers from enacting legislation curbing the operations of the App Store, but it could make them more difficult to pass or hold up in courts.

What happens next?

Epic isn't happy with the verdict. It will likely appeal the case in an attempt to force Apple to make further concessions. Judge Gonzalez Rogers even noted the 30% App Store commission is probably higher than it should be, but since Epic didn't call into question the amount of the commissions -- just that there's a commission at all -- she couldn't rule on it. As such, that may be grounds for another lawsuit.

Additionally, Apple faces anti-competition cases around the world, including from the EU. And it's just one of several big tech companies under fire from regulators and lawmakers in Washington. So, there's still a lot of uncertainty about the future of the App Store. But if the ruling is any indication, Apple is in a strong position to defend itself and one of its most profitable sources of revenue.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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Adam Levy owns shares of Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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