Apple has two billion reasons to fight over its App Store

Apple’s lawyers have an unenviable job: to defend a key pillar of a two trillion dollar company it is a great challenge. The outcome of the Apple and Epic Games trial, which begins Monday, is far from final. And even a ruling may not settle the matter for a while, as the legal and financial muscle on both sides virtually guarantees appeals.

Apple is one of the most liquid companies in the world, with nearly $ 83 billion in net cash and a business that generated more than $ 90 billion in free cash flow in the last four quarters, according to FactSet. Meanwhile, Epic raised $ 1 billion in its latest round of funding in April and has a sponsorship roster that includes Sony, Walt Disney, and Chinese video game titan Tencent.

But Epic is not Apple’s only problem when it comes to defending its App Store business model: the European Union accused the creator of the iPhone last Friday of antitrust violations for allegedly abusing your control about the distribution of music streaming apps. Apple has the opportunity to defend its position before the EU regulatory commission before it issues its decision.

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Both the Epic case and the EU investigation attack elements App Store model key, such as the company’s strict control over the applications that can be installed on its devices, and its requirement that transactions in those applications be processed through its own system. Lawmakers and regulators on this side of the pond are also on the question.

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The latest developments come as the App Store business is stronger than ever. Last week, Apple posted record service revenue of $ 16.9 billion in its fiscal second quarter, up 27% from the prior year. The app store was considered the biggest driver of such growth in the company’s quarterly report, as it has consistently been in the last five years. Apple stated in a video conference after the quarterly results that App Store revenue broke a record for the quarter, and analysts expect the business to generate nearly $ 21 billion in revenue in the company’s current fiscal year, which ends in September, according to consensus estimates from Visible Alpha.

That would only represent about 6% of total revenue Apple’s planned for the year. But services like the App Store have a big impact on Apple’s bottom line, given the high margins they generate compared to device sales. Apple’s gross margin on service revenue reached 70% in the latest quarter – an increase of 12 percentage points since the company began publishing service margins at the beginning of its 2018 fiscal year.

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Services are key in Apple’s efforts to diversify its business away from hardware sales. Those efforts have penetrated investors, who have boosted the value of the company more than 170% in the last three years, and it now stands at more than two trillion dollars. Apple has indicated a willingness to negotiate: The company cut its App Store share in half for small developers at the end of last year.

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But the key points at issue in the Epic case and in the EU charges go far beyond the Apple slice size. And those seem like areas where the company seems less likely to compromise. “The idea behind managing the App Store to achieve the privacy and security that our consumers want I think is very important,” said Apple CEO Tim Cook at the company’s video conference last week. Now the company just has to convince a lot of people that it has that power.

* Fixes and Amplifications: Epic’s last funding round was in April, an earlier version of this article mistakenly said it was in May.

* Content licensed from ‘The Wall Street Journal’.

Apple’s lawyers have an unenviable job: to defend a key pillar of a two trillion dollar company it is a great challenge. The outcome of the Apple and Epic Games trial, which begins Monday, is far from final. And even a ruling may not settle the matter for a while, as the legal and financial muscle on both sides virtually guarantees appeals.

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