By Therese Poletti
Even with the profitability of its App Store at the core of the case, the recent antitrust trial between “Fortnite” maker Epic Games Inc. and Apple Inc. couldn’t fully expose how much money flows into Cupertino from apps.
It’s a question that investors would love to know the answer to, because it addresses the entire business model of the App Store. Apple does not disclose any detailed financial results of the App Store, part of a services business that brought in $54 billion in its most recent fiscal year and was hailed as the segment that spurred growth as iPhone sales growth slowed down in recent years.
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The trial offered glimpses of actual numbers on App Store profitability, but it was disputed and the actual numbers were hidden from view. In the second week of the trial, in which the maker of “Fortnite” alleged monopolistic practices by Apple /zigman2/quotes/202934861/composite AAPL +0.15% in federal court in Oakland, Calif., Epic called an expert witness — Ned Barnes of the Berkeley Research Group — to the stand.
Barnes calculated that the App Store had hefty profit margins, which increased to 78% in 2019, up from 75% in 2018, and generated $22 billion in commissions for Apple last year. He was part of a group of economic experts hired by Epic in its quest to prove that Apple’s App Store dominates the market.
Apple disputed that analysis and noted that it spends billions on research and development that are not counted against those profits.
“We invest like crazy in [research and development],” Cook said in his testimony at the end of the trial . He said Apple spent $100 billion since the introduction of the iPhone in 2007, and $50 billion over the past three years. (According to Apple’s last three years of 10-K filings, it was $39.2 billion). He also noted that security and infrastructure costs, in addition to innovative features, cut into its profit margins.
But clearly, Apple did not want Barnes and his testimony heard at all. A few weeks before the trial started, Apple’s attorneys tried to seal the courtroom during his testimony, according to a pretrial motion , because Barnes was relying on “nonpublic, unaudited financial information.” The actual information he studied was not shared in open court, and he was barred from discussing the raw numbers he saw, which were only shared with the judge behind closed doors. Barnes did not respond to a request for comment.
What Apple was willing to say in the courtroom about the App Store’s financials was that its commission, the rate that it charges developers to host an app on its store, has declined over time. The company’s 30% commission does not apply to everyone, and 85% of the apps are free, with no commission, Cook said.
Apple has reported the overall margin on its “services” business since ditching iPhone unit sales from its reports amid a slowdown in unit sales two years ago . The numbers it reports suggests that the fat profit margin Barnes quoted likely isn’t far off — total services margin came in at 70.1% in the most recent quarter, and that includes other businesses that are expected to lose money for Apple right now, such as its music and television streaming services.
During the trial, Apple’s attempts to avoid talking about the billions it takes in from third-party apps were truly laughable. Before Cook’s testimony, Apple’s former marketing chief Phil Schiller was grilled by Epic attorney Katherine Forrest, who openly mocked him when he could not say if the App Store was profitable.
“How is it as the executive responsible for this major business in the country, you don’t know if its profitable?” Forrest asked.
“It’s not what we focus on,” Schiller said. “It doesn’t come up.”
Forrest also reminded him of a press release issued by Apple in 2017 , which stated that software developers earned $70 billion from the App Store since its launch in 2008, which would infer at least $20 billion in profit to Apple. (In court, Apple executives repeatedly referred to the App Store as an “economic miracle” without any sense of irony when they later played dumb about its P&L.)
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With a 30% commission, Apple would have received about $20 billion, she said, which would strongly indicate profitability, but Schiller again said he did not know.