summation
- Apple (AAPL) is designated as one of the six major "gatekeeper" companies that dominate the overall online service industry in the EU.
- Although the detailed implementation plan of the bill is not known, it is expected to curb the influence of the six major companies with the goal of ensuring fairness in the online service industry such as SNS, platforms, and search engines.
- Apple's sales in the European market are about a quarter of the total, which is expected to deal a blow to Apple's growth strategy that used the service sector as a growth engine.
Comments on European digital market legislation
On September 6, the EU defined six companies operating in Europe as "gatekeepers." The EU believes that these six companies have an oligopoly over 22 core online services, and their goal appears to be to ensure fairness in new entry across the online service industry, increase transparency, and curb the influence of dominant platforms. The six companies defined as gatekeepers and the 22 core online services mentioned by the EU are as follows.
FieldService NameSNSTik Tok, Facebook, Instagram, LinkedInPlatformGoogle Maps, Google Play, Google Shopping, Amazon Shopping, iOS App Store, Meta ShoppingAdvertising PlatformGoogle, Amazon, MetaBrowserChrome, SafariMessengerWhatsApp, Facebook MessengerSearch EngineGoogleVideo PlatformYouTubeEU confirms six (mostly US) tech giants are subject to Digital Markets Act (Content source: Techcrunch)
The EU Commission specifically mentions this as follows:
- A fairer business environment will be created
- Startups will not have to adhere to unfair terms and will have the opportunity to compete and innovate.
- Consumers will also be able to choose from diverse opportunities and better services, and expect fairer prices.
- Unfair practices by gatekeepers to gain unfair advantage will not be tolerated.
So what is the impact on Apple??
Although no detailed regulations or cases have been released yet, the announced content virtually covers the entire range of Apple's service sales, so it seems inevitable that not only profitability but also Apple's operating policy, which has been focused on a closed system, will be affected. The bigger problem is that Apple's recent growth relies on the service sector.
Item Category 202220222020Net SalesProducts316,199297,392220,747Services78,12968,42553,768Gross MarginProducts114,728105,12669,461Services56,05447,71035,495Total Net Sales394,328365,817274,515Total Gross Margin170,782152,836104,956 (Data Source: Apple Inc. (AAPL) - 10-K - Annual Report)
Item classification 2023. 7.1 (3 Month Ended)2023. 6. 252023. 7. 1 (9 Month Ended)2023. 6. 25Net SalesProducts60,58463,355230,901245241Services21,21319,60462,88658941Gross MarginProducts21,44821,87084,20590157Services14,96514,01544,51642530Total Net Sales81,79782,959293,787304182Total Gross Margin36,41335,885128,721132687(Source: Apple Inc. (AAPL) - 10-Q - Quarterly Report)
Apple's service division sales are ahead of products in terms of both growth rate and profitability. The service portion of sales, which was around 20% as of the end of 2022, rose to about 26% as of the last quarter. When based on revenue, the difference becomes more pronounced. The operating margin ratio, which was around 34% at the end of the year, is around 41% as of the most recent quarter. Of course, it cannot be said to be a fair comparison because the numbers are derived based on different dates and periods, but no matter what period of time is compared, the importance of service sales and profits in Apple's performance is increasing is consistently confirmed.
Apple sales by region, unit: $bn (Source: Bussiness of apps)
Europe is a major source of revenue, accounting for about a quarter of Maple's sales. If the EU's digital-related legislation is implemented and its purpose is implemented, it is expected to be a significant blow to Apple. Even if the impact on service sales and profits is not significant, it is expected to be a test of whether the growth that has been dependent on service sales can be sustained.
conclusion
Apple and the EU have previously worked together on Music streaming app related(2021), Apple Pay related(2022), USB-C type gender related(2023) There have been several legal and non-legal disputes, but such disputes are likely to become more frequent in the future. As it is known that a fine of up to 10% of sales can be imposed for serious violations, it seems inevitable that Apple, which generates a quarter of its sales in Europe, will have to revise its management strategy.