Apple and Alphabet have effectively run a duopoly on app downloads - but will events in South Korea cut off a lucrative - and growing - revenue stream. Apple's [AAPL] share price has gained over 14% this year - a solid, if unremarkable performance considering the iPhone maker's phenomenal performance last year. In comparison, Alphabet's [GOOG] share price has thundered to a 66% gain so far this year (as of 31 August) - hitting its longest monthly sequential growth in a decade. Driving this has been as advertisers upped their ad spend on Google, leading to higher margins and better returns than any of its mega-cap tech stock peers.
Over the three month period, the two companies' performance has been at a par. Apple's share price has gained over 21% and Alphabet is up 20% - both easily outpacing the tech-heavy Nasdaq's 11% gain over the same period.
Along with hardware (Apple) and ad revenue (Google), the two have seen services revenue grow, including billions earned from app downloads on iPhones and Android devices. Yet with looming antitrust legislation - kicking off in South Korea - the giants of Silicon Valley could soon have to open up this lucrative revenue stream to competition.
Apple and Alphabet's app duopoly
Apple and Google have operated a duopoly on payments for apps and in-app purchases in the smartphone era. Developers who make money through these apps have to agree to paying the tech giants up to 30% of sales. The app stores do not allow alternative payment methods citing fraud and privacy concerns.
This month saw a setback for app stores as South Korea moved to introduce legislation to ban app stores by Apple and Alphabet's Google from charging software developers commissions on in-app purchases. Apple has already been in litigation with the game developer of Fortnite in the US on a similar issue. If the bill passes in South Korea it would allow users to directly transact with developers, possibly removing Apple and Alphabet from the equation.
"This could presage similar actions elsewhere," Omdia analyst Guillermo Escofet told Bloomberg. "Regulators, lawmakers and litigators in North America and Europe are also scrutinising app-store billing rules, and the overriding political mood has become hostile to the enormous amount of power concentrated in the hands of the tech giants."
In the US, lawmakers proposed bi-partison legislation in August to promote app store competition. The legislation describes Google and Apple as having 'gatekeeper control of the multi-billion dollar app economy, stifling competition [and] disadvantging consumers,' in a commentary by US Senator Richard Blumenthal. The proposed legislation would give consumers more choice and 'smaller startup tech companies a fighting chance'.
Why should investors care?
During the pandemic people turned to their smartphones to fend off the boredom of lockdown. Apple's app store grossed over $64bn in 2020, up from an estimated $50bn in 2019 and $48bn in 2019, according to analysts at CNBC. Revenue on Apple's app store grew 28% in 2020, up from a 3.1% growth the previous year. Sensor Tower estimates that Google Play brought in $38.6bn in 2020, while the unsealing of a court filing at the end of August revealed that that the store brought in $11.2bn in 2019.
Overall, Sensor Tower says consumers spent roughly $111 billion on mobile apps in 2020 - a 30.2% increase from the year before. As the area continues to grow, it's no surprise to see developers want a greater share of the profits, and it won't be a surprise to see Apple and Alphabet fight proposed legislative changes with litigation.
Investors seem so far unconcerned with the events in South Korea - both Apple and Alphabet's share prices gained last week. The country sits in Apple's 'Rest of Asia' segment when it comes to reporting quarterly results. In the fiscal third quarter, this segment brought in $4.1bn, geographically the lowest revenue generator for the company.
However, if legislation comes to fruition in more lucrative territories, such as the Americas or Europe, then both could find growing revenue drivers stymied, and it prove to be a longer-term headwind for the stocks.
For now, the investment case for Apple over the next year is likely to focus on iPhone sales, while for Alphabet it is advertising revenue and its cloud business.
Among the analysts polled on Yahoo Finance, Apple's share price has an average $166.23 - a 9.4% upside on Tuesday's close. Alphabet has a 3,103.33 price target, which would see a 6.7% upside on Tuesday's closing price of $2.909.24.