Apple Stock Could Be Hurt by Antitrust Probe
Many media websites reported yesterday that the Department of Justice (DOJ) launched a major probe of large tech companies for alleged anti-trust violations. Speculation was rampant that Apple (NASDAQ:AAPL) will be one of the targets of the probe.
Although many analysts and pundits declared that the company will not be hurt by the probe, I believe that Apple and Apple stock could be meaningfully damaged by the investigation in the short-run and the long-run.
The Short-Run Damage to Apple Stock
In the short-term, the probe will cause some owners of Apple stock and some important company executives to lose confidence in Apple’s outlook. As a result, a number of top executives will leave the company. As it becomes clearer that the DOJ is likely to take punitive action against the company, a sizable number of the owners of AAPL stock will sell their shares.
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Moreover, the latter two trends are likely to create a cycle that could become quite ruinous for AAPL stock. Specifically, if executives leave the company, this will cause investors to sell which will lower the value of AAPL stock. As their stock options become less valuable, more executives could leave the company, starting the mini-cycle over again.
It’s quite clear that executives don’t like dealing with antitrust probes. No one (except maybe lawyers, and even that’s questionable) likes dealing with powerful, intrusive government agencies like the DOJ. Bill Gates famously left Microsoft (NASDAQ:MSFT) during that company’s dealings with DC’s antitrust probe.
Interestingly, AAPL recently announced that its longtime design honcho, Jony Ive, would be leaving the company. It’s possible that one of the reasons Ive decided to leave Cupertino was because he saw the proverbial “writing on the wall” vis-a-vis the DOJ probe.
Finally, the investigation could reduce the likelihood of Apple launching successful new projects or innovations because it will distract Apple’s remaining top executives.
The Long-Term Damage to AAPL Stock
The conventional wisdom is that the large tech firms being investigated by the DOJ, including Apple, can’t be committing antitrust violations under American law because they don’t harm consumers. But a close look at Apple’s App Store shows that its anti-competitive practices do meaningfully harm consumers.
Specifically, a May 2019 post on Medium by Phillip Shoemaker, an ex-Apple employee who was in charge of approving apps for the App Store from 2009 to 2016, reveals that the company’s 30% commission on App Store sales result in consumers paying high prices for content. According to Shoemaker, content creators with “tight margins” either have to raise their prices or avoid the App Store altogether. Apple responded to these companies’ complaints by creating what Shoemaker calls “the Dumb Reader rule.”
Under the rule, content creators could distribute “previously purchased content” to their users without paying the App Store’s 30% tax. Content creators who exploit the rule cannot tell users how to purchase new content outside of the app.
Amazon (NASDAQ:AMZN), for example, can allow consumers to look at books they have already purchased from Amazon elsewhere without paying Apple its fee. But AMZN cannot sell new books through Apple’s App Store unless it gives Apple its 30% cut. Moreover, it can’t give users a link that would take them to a site where they can purchase books, or even tell them where they can buy the books.
It’s quite clear how consumers are hurt by Apple’s App Store rules. As Shoemaker points out, they will either have to pay higher prices to cover AAPL’s cut or they will be deprived of the ability to access content on their iPhones. And consumers who like an app’s free content will struggle because of Apple’s rule against advertising ways of buying content outside of the App Store.
Shoemaker also points out that, as Apple itself begins selling more products, such as music and TV content that compete with app owners, the owners will become even more reluctant to pay Apple’s fee. I would add that Apple now has a vested interest in finding ways to make it harder for these app owners to sell their content on the App Store.
Interestingly, Shoemaker tries to justify Apple’s conduct by using an analogy. Target (NYSE:TGT), he notes, doesn’t allow wholesalers to advertise on their products in Target’s stores that their goods are available elsewhere, like on Amazon. And Target makes a meaningful profit on each product sold, he noted.
I would argue that the App Store is more like a shopping mall than an individual store. Imagine if a mall owner charged a 30% tax on all products sold within its mall and prohibited its tenants from telling consumers, while they were in their stores within the mall, how they could buy products in other venues. Imagine also that the mall owner started opening its own competing stores within the mall that would not pay the tax. At that point, the owners of the tenant stores would justifiably begin to fear that the mall owner would take steps to promote its own stores at their expense. Consumers, regulators, and politicians would be revolted by the mall owner’s conduct and would make a push to rectify the situation.
Shoemaker suggests that Apple will have to allow app owners to provide links to outside sites where they can sell their content. I think that regulators could very well seek to eliminate the 30% fee and try to get Apple to charge a fixed annual “rent,” like a shopping mall.
But in either scenario, the revenue of Apple’s App Store will be meaningfully hurt. And as I wrote in a November 2018 article, “If Apple’s revenue from its App Store drops by a third….the company’s Services revenue, which is viewed by most Apple’s bulls as the company’s growth engine, would be about 11% lower than current projections. Such an outcome would demoralize many AAPL bulls and thousands of owners of Apple stock, possibly convincing them to unload the stock.”
Finally, restrictions on Apple’s promotion of its own apps could hurt the ability of its upcoming streaming content service to compete with Netflix (NASDAQ:NFLX) and Disney’s (NYSE:DIS) Disney+. Since investors have high hopes for Apple’s streaming service, such restrictions could have a negative impact on Apple stock.
The Bottom Line on AAPL Stock
In the short-term, the antitrust probe could spur some of Apple’s top executives to leave and scare some owners of Apple stock into selling their shares. These trends could reinforce each other.
In the long-term, Apple could be forced to change its App Store rules, which meaningfully harms consumers. These rule changes could significantly lower the company’s services revenue and harm its efforts to promote its streaming video offering, further hurting the performance of Apple stock.
As of this writing, the author did not own any shares of companies mentioned above.
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