Apple warns of ‘material’ risk from App Store legal challenges

Apple has for the first time warned investors that it faces a “material” financial risk from the regulatory pressure on its App Store, a sum that could potentially run into billions of dollars.

The iPhone maker’s latest annual report, published on Friday, is peppered with new warnings and disclosures about the legal risks rising up around its business in a marked change from last year’s filing, as it was forced to acknowledge the growing political hostility against big tech companies.

Most notable is its reference to the potential “material” hit to its App Store commissions should it lose the growing legal challenges against its model. Apple takes a 30 per cent cut of most digital purchases through the App Store, falling to 15 per cent for some subscriptions, which it says reflects the costs of curating and securing the marketplace, and improving its developer tools.

“If the rate of the commission that [Apple] retains on [App Store] sales is reduced, or if it is otherwise narrowed in scope or eliminated, the company’s financial condition and operating results could be materially adversely affected,” Apple wrote.

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While there is no strict definition under US stock market rules of what constitutes a “material” event, the Securities and Exchange Commission has said it has “no objection” to using a percentage threshold such as 5 per cent as a “rule of thumb”, though other factors should also be considered.

No dollar figure was specified in Apple’s report but for a business of its size, which reported revenues of $275bn and net income of $57bn in the financial year to September, a “material” sum might reach billions of dollars.

Apple declined to comment beyond the filing.

Services such as the App Store and Apple Music are the company’s second-largest line of business after the iPhone, bringing in $53.8bn in the last financial year, up 16 per cent annually.

But Apple’s model faces challenges from multiple directions.

This year, Apple has been hit with a lawsuit from Fortnite maker Epic Games and an antitrust investigation from the European Commission into its App Store rules, as well as the threat of a similar case from the US Department of Justice.

In September, app developers including music service Spotify, dating app group Match and productivity tool maker Basecamp formed the Coalition for App Fairness to lobby against what it calls “excessive fees” and “rules that give Apple’s own apps an unfair advantage”.

Apple’s responses to Epic’s lawsuit have warned that it could “threaten the entire App Store ecosystem” but the iPhone maker has not given any indication of the potential cost should it lose its various legal battles.

When Apple’s chief executive Tim Cook was called before the US Senate judiciary committee in July, he said the App Store was an “economic miracle” that promoted competition, saying: “If Apple is a gatekeeper, what we have done is open the gate wider.”

Asked on Thursday’s earnings call by one analyst about antitrust pressure on Google and how it might affect Apple’s services business, Mr Cook said: “I have no idea how the DoJ suit will go but I think it’s a long way from a conclusion on it.”

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