How the negative Supreme Court ruling, China tariffs will impact Apple

Apple’s week has gone from bad to worse: The company was not only dealt a negative ruling by the US Supreme Court as part of a class-action lawsuit, but now rising trade tensions between the US and China threaten to impact iPhone demand.

Business Insider Intelligence

Apple’s Supreme Court loss

In a 5-4 decision handed out on Monday, the US Supreme Court ruled that an antitrust class action lawsuit against Apple will proceed in a lower court — a move that could have deep ramifications for the tech giant. The plaintiffs, four iPhone users, allege that Apple unlawfully monopolized the App Store through a number of practices.

Apple charges developers up to 30% for sales made in the App Store, a cost that the suit claims is often passed on to consumers via markups. And, since rivals are barred from competing for these users outside the platform — iPhone users can only purchase apps via the App Store — the lawsuit argues a higher than competitive pricing structure is being created.

In response to Monday’s ruling, Apple spokesman Josh Rosenstock stated, “Developers set the price they want to charge for their app and Apple has no role in that. The vast majority of apps on the App Store are free and Apple gets nothing from them,” according to The New York Times.

What does this ruling mean for Apple?

Apple will now have to defend its practices in a lower court, opening it up to losses in the future if it fails to defend its position. Firstly, the smartphone manufacturer could be on the hook for monetary damages, which could reach billions of dollars.

And if it’s forced to change how it operates the App Store, it could have a negative impact on the Services segment’s revenue growth. Depending on the case’s outcome, Apple may have to enable iPhone users to download apps from other sources or reduce how much it charges developers, for example. This could mean bad news for the valuable Services segment: In the first half of 2019, Apple’s Services — where the firm houses App Store financials — experienced $22.3 billion in sales, accounting for 20% of total revenue in its fiscal Q2 2019 (ended March 30, 2019).

While Apple doesn’t break down its Services segment, the firm did reveal in January that developers had earned $120 billion from the App Store since its launch in 2008, with more than a quarter of that coming in the past year alone. Using those figures, we can calculate a rough estimate of the max amount Apple could have earned from App Store sales in 2018; if developers earned at least $30 billion in 2018 after a 30% fee was applied, Apple would have earned more than $12.8 billion.

Rising trade tensions

China recently announced that it’s raising tariffs on $60 billion worth of US products in response to tariff hikes on $200 billion worth of Chinese goods. And now the Trump administration is reportedly preparing to raise tariffs on even more Chinese imports — $300 billion worth — up to 25%, according to NPR.

What could a trade war with China mean for Apple?

Apple is especially vulnerable to a trade war between the world’s two largest economies because the US-based company assembles its most important product — the iPhone — in China. If higher tariffs are placed on Apple, the firm will have to either absorb the costs or increase the price of its devices. Neither solution helps Apple as it aims to reverse falling iPhone sales, which saw a 17% year-over-year decline during the firm’s fiscal Q2 2019 yet still accounted for over half the company’s revenue.

The cost to make iPhones could see a 2-3% increase due to the tariffs, hurting Apple’s bottom line, according to Wedbush analyst Daniel Ives who was cited by Bloomberg. Furthermore, it would take a price increase of about 14% to absorb the impact of a 25% tariff, according to Morgan Stanley analysts cited by Business Insider, which would likely depress demand for an already pricey device.

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