Could Spotify Spoil Services Growth For Apple?
Updated: Jul 8, 2019
After Spotify complained to the European Commission over App Store practices, could Apple's Services growth now be under threat?
The music industry is no stranger to high-profile spats, but one of the biggest beefs of the year so far has actually been between two companies: Apple (NASDAQ: AAPL) and Spotify (NYSE: SPOT).
Back in March, Spotify filed an antitrust complaint against Apple with the European Union in which the Swedish company alleged that Apple was harming consumer choice and stifling innovation via the rules it enforces on the App Store. The company also launched a dedicated website to highlight their grievance with the company, pointedly named Time to Play Fair.
Specifically, Spotify is taking issue with the 30% cut that Apple takes from subscriptions made via the App Store. This “tax” is instrumental in harming music streaming services that compete with Apple’s own Apple Music app, according to Spotify CEO Daniel Ek, because Spotify has to “artificially inflate” its prices “well above the price of Apple Music” to make up for this cut.
Ek also claimed that Apple “routinely blocks our experience-enhancing upgrades,” including locking Spotify and other competitors out of Apple services like Siri, HomePod, and Apple Watch.
Of course, Apple was quick to hit back, launching its own website to refute Spotify’s claims and asserting that the App Store is run this way in order to protect both customers and developers. Recently, the company also disputed the amount of ‘tax’ that Spotify claims it pays to them, stating that the company has greatly exaggerated how much money is being taken by the App Store.
Nonetheless, it looks as though Apple will be formally investigated by the European Commission over Spotify’s claims at some point. The European Union is well-renowned as a strident advocate of consumer rights, fining Google (NASDAQ: GOOGL) a record-breaking $5 billion last year for allegedly abusing its Android market dominance.
With a reported cash pile of more than $245 billion at the start of this year, a fine of that magnitude wouldn’t necessarily worry Apple. However, any restrictions placed on the way the App Store operates could seriously impair the growth of one of the company’s most exciting divisions.
For Apple, the real worry isn’t that Apple Music continues to lag behind Spotify in terms of subscriber numbers (currently an estimated 96 million vs 56 million global paid subscribers). Rather, a ruling against Apple’s App Store practices could have much more major effects on the future of Apple’s much-touted Services division as a whole.
It’s no secret that Apple’s future lies in Services, with reported revenue growth of 20% in its recent earnings call to hit $10.9 billion and gross margins of nearly 63%. Cook also said that Apple is on track to double its Services business from 2016 to 2020 as reliance on hardware sales like the iPhone falls.
Of this, a significant amount comes from the App Store. According to the app analyst firm Sensor Tower, users of the App Store spent an estimated $46.6 billion in 2018, which was 88% more than the $24.8 billion spent on Google Play. This translated to year-over-year growth of 20.4% for the App Store.
Recently, there has been increasing focus on the power of the so-called Big Tech companies, with many politicians — including Democratic Presidential candidate hopeful Elizabeth Warren — calling for increased regulations and even the break up of companies like Facebook, Google, and Amazon. Apple has largely escaped such scrutiny in the U.S. to this point but has been at the wrong end of an EU ruling already with regards to its tax status in Ireland.
If a case is eventually brought against Apple, it will likely take years to resolve. But it will also likely see Apple forced to change the way it operates with regards to its App Store, at least in Europe, which could upset the proverbial apple cart with future growth plans.
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