Epic claims App Store Had 78% Margin in 2019

(Bloomberg) — Epic Games Inc. expert claims that Apple’s App Store acquired an operating margin of 78% in the fiscal year 2019 based on documents obtained from the company. 

Ned Barnes, a financial and economics researcher, provided the said figure and confirmed that the report was “prepared by Apple’s Corporate Financial Planning and Analysis group and produced from the files of Apple CEO Tim Cook.”

The Cupertino, California-based technology giant, questions the accuracy of Barne’s calculation and urges a judge to restrict the discussion of App Stores’ profit in public until the company heads to a high-stakes trial in Oakland, California. 

Epic, the creator of the blockbuster game, Fortnite, asserts that the App Store operates as a monopoly with its 30% commission on developers – a statement that Apple disputes by assuring that it doesn’t abuse its market power.

Epic also sues Apple in the U.K and Australia, and the company is under heat from antitrust regulators in the U.S. and abroad. The fate of these companies relies on dueling economists as they build up their case to the U.S. District Judge Yvonne Gonzalez Rogers, who is assigned to conduct the three-week trial without a jury. 

Barnes points that an Apple employee disclosed the numbers to him based on the company’s internal documents, which misleads the public from the whole picture. The expert also revealed additional calculations that resulted in a higher margin estimate of 79.6 for 2018 and 2019. 

Apple released an official statement emphasizing that the “calculations of the operating margins for the App Store are simply wrong and we look forward to refuting them in court.”

Barnes allegedly secured documents showing the profit and loss estimation of the App Store for the fiscal year 2020. He stated that the company had been monitoring and tracking the App Store profit for years and said he has also obtained reports for 2013 through 2015.

Experts on App Store’s Margin

Apple makes revenue from the App Store by charging a 15% or 30% commission from developers with paid app downloads, subscriptions, and in-app purchases.

Analysts presume that App Store’s margins have grown since 2019.

Sensor Tower gauges a $22 billion-generated commission from the previous year, while Toni Saccanaghi, Bernstein analyst, predicts an 88% gross profit from App Store this year. 

Apple executives refuted and claimed the company doesn’t track the profit and loss statements for individual business units. “When we look at the App store, it’s not a separate standalone business for us,” Apple’s chief compliance officer, Kyle Andeer, explained at a congressional hearing. “It’s an integrated feature of our devices,” he supported. 

Cook mentioned the same on the pretrial testimony “Apple’s business is not structured that way that allows a person to push a button and obtain an App Store profit and loss statement. 

Apple reiterates that it doesn’t allocate costs for the App Store, and the internal documents that reveal revenue for the marketplace don’t cover expenses. This claim from the company only suggests that any margins or profits don’t reveal the entire picture.

Richard Schmalensee, a Massachusetts Institute of Technology economics expert, pointed in a witness testimony on behalf of Apple that Barnes’s estimate of App Store’s operating margin is inaccurate because it isolates at one segment of the iOS ecosystem and artificially boosts the operating margin of the segment. 

The company answers the request to the judge for App Store’s financial data in open court by explaining that the information may unduly confuse securities markets and participants in those markets, including pension funds, mutual funds, and other ordinary Apple stock investors.