U.K. investigates multi-billion dollar deal between Apple and Google
Apple is being looked at closely by U.S. and European regulators for possibly violating antitrust laws concerning the App Store. Apple doesn't allow iOS and iPadOS users to sideload apps from a third-party app store, but by taking a 30% cut of in-app purchases, Apple is forcing some developers to raise their pricing in order to keep their margins up. A good example of this is Spotify which competes against Apple Music. Online, both charge the same $9.99 per month for an individual subscription and $14.99 for a family subscription of up to six members.
Google's payments to Apple are being investigated as anti-competitive
If you look at Spotify's pricing in the iOS App Storefront, you'll see that the prices have been hiked by 30% to make up for Apple's cut. But new Spotify subscribers cannot sign up for the service via the App Store. The higher pricing only comes into play for renewals that go through Apple’s in-app payment system. Spotify subscribers have to cancel their automatic renewals through Apple and sign up with Spotify and that gives Apple Music an unfair advantage over its main rival.
Apple could be forced by the U.K. to include screens like this one so that users can select an alternative search engine
Wednesday, Reuters reported that the U.K. markets regulator is investigating the payments made to Apple by Google that keep the latter's Search app the default on iOS. In a report released yesterday, the U.K. markets regulator said that these payments create a significant barrier to entry and expansion." Last year, Google reportedly paid out the equivalent of $1.5 billion to be the default search engine on various devices with Apple receiving the bulk of that money.
The final report of the U.K. Competition and Markets Authority, which was investigating online platforms and digital advertising, found that Google's search rivals such as Microsoft's Bing, Verizon's Yahoo, and independent search engine Duck Duck Go are being harmed by Google's payments to Apple. However, those three search engines also pay Apple to be listed as search engine options for the iPhone (just not close to the amount paid by Google).
Toni Sacconaghi, an analyst with Bernstein, said earlier this year that Apple receives about $9 billion per year in licensing deals with gross margins above 90%. Over $7 billion of that figure comes from payments made by Google. These payments are reported as Services revenue by Apple; the company had previously set a target of $50 billion in such revenue for this year, double the $25 billion in Services revenue it took in back in fiscal year 2016. Other businesses in this segment include Apple Pay, the App Store, Apple Music, Apple Pay, AppleCare+, iCloud, and more.
In the report, the Competition and Markets Authority said that it would pass along a range of options to the enforcement authorities. One of these options would require Apple to include a "choice screen" when a new iPhone is being setup. This is something that Google offered users last year after the European Commission (EC) found that the company was being anti-competitive by requiring phone manufacturers to install Chrome and Search as the default browser and search engine on Android phones. The report also suggested that Apple's ability to monetize its default apps be restricted. This would be "very costly" Apple told the regulators.
Apple decided to focus on its Services business just as iPhone sales had peaked in fiscal year 2015. During the first half of fiscal year 2020, Apple generated Services revenue of $26 billion which puts the company slightly ahead of its target for the Services business. The fiscal third quarter of 2020 covers the period from April through June and should be announced in late July or early August. Fiscal-fourth quarter earnings, which includes the three months between July through September, could be released in late October or early November.
Big Tech is under the microscope in the U.S. and Europe with anti-competitive behavior at the top of investigators' lists.