Netflix Exits App Store, Apple as a Service Theme Intact
We believe the investing view on Apple is shifting to Apple as a Service. The news that Netflix is leaving the App Store is somewhat expected, given the company began testing alternatives to the App Store last summer. The move is a fractional negative to earnings, along with a psychological headwind to investors embracing the theme of Apple as a Service. That said, we believe Spotify is the only other brand at risk of leaving, and the Apple as a Service theme is intact.
- Netflix leaving the App Store only affects new subscriptions, therefore, the financial impact on Apple will be de minimis (0.07% of Apple’s overall revenue and 0.14% of earnings. Details below).
- You’ll still be able to watch Netflix on Apple devices.
- Spotify (the only other brand strong enough to leave the App Store) has also been testing ways to avoid paying Apple for new in-app subscription purchases by forcing customers to visit mobile sites for subscription sign-ups.
- Outside of Spotify, we think the risk of further defections is low. The value of the App Store for developers is app discovery and conversion. Loss of new subscribers due to additional sign-up friction will force most apps to continue offering subscriptions through the App Store.
- The real risk is losing revenue from in-app purchases, but given the walled garden nature of iOS, it’s unlikely that in-app purchases can be enabled off-platform. This means that Epic Games (Fortnite), which has paid Apple roughly $100m this year, will likely continue to pay Apple the required 30% of in-app purchases.
- We estimate that, over a 4 year period, an average subscription app will pay Apple 19% of its revenue.
- The Google Play store is at more risk, as evidenced by Epic Games’ decision to launch on Android without the Google Play store.
Apple’s Deal with Developers
Apple keeps 30% of an in-app subscription over the first 12 months and 15% in each of the following months. Assuming a 4-year subscription life (which is about where Netflix is today), Apple takes 19% over those 4 years. For in-app purchases, Apple keeps 30%.
Netflix and Spotify Leaving App Store Fractional Impact to Model
Services revenue represented 16% ($10.0B) of Apple’s revenue in the Sep-18 quarter, growing at 17%. We estimate apps account for 40% of Services revenue, and 20% of app revenue comes from in-app subscription purchases, of which at most 5% come from Netflix and Spotify. There is a risk that Netflix and Spotify’s brand is strong enough to motivate customers through the additional subscription sign-up steps. If Apple loses their cut of all Netflix and Spotify subscription revenue long-term (not just new subscriptions), it would reduce the overall Services revenue by about 0.4%, and Apple’s overall revenue by 0.07%. This headwind would lower the Services growth rate in 2020 from 15% to 14%.
Last spring, Fortnite launched on Android and opted to skip the Google Play store altogether. In other words, Epic Games will capture 100% of revenues from in-app purchases. Fortnite remains in the App Store on iTunes, so Apple receives a 30% cut of all in-app purchases (about $100m from Fortnite over the past 9 months). This is unlikely to change, as the App Store is operated as a walled garden. On the other hand, Android is at risk of developers avoiding the Google Play store, because users can download apps directly from the web to an Android device. Developers like Epic or Supercell, which are well-established and have large marketing budgets, are the most likely candidates to opt out of Google Play.
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