Why Apple's services fell short of expectations

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The company's highest-margin division grew more slowly than expected in the June quarter – and Apple cited four reasons when asked. One of these concerns regulatory interventions in the App Store business, and this is the first time it has been reflected as an item in the balance sheet.

At $30.74 billion, services revenue was 12.1 percent higher than in the same quarter of the previous year, but significantly below the overall group growth of 16.4 percent. Analysts had expected around $31 billion. This, along with the outlook for the September quarter, was one of the factors that caused disappointment on the stock market. Chief Financial Officer Kevan Parekh answered the corresponding analyst question in unusually detailed terms.

Four reasons that Apple itself cites

Parekh attributed the deviation to several overlapping factors.

First, the mobile gaming business has declined. Second, Apple has changed the App Store business model in certain countries. Third, a court order regarding redirects from apps, for which Apple no longer charges a commission, remains in effect in the US – the company expects the Supreme Court to accept the appeal. Fourth, exchange rates are having a negative impact.

In addition, there is a base effect, which Parekh specifically mentioned: In the same quarter of the previous year, the film F1 was released in cinemas, while there was no comparable event this year. As a result, the comparative figure was higher than would correspond to the current business.

The regulation becomes visible as an item

The second point is interesting because Apple is citing regulatory changes as the reason for a concrete numerical result for the first time. These changes include, among other things, adjusted fee models in Japan and Brazil, as well as lower fees for alternative app marketplaces in the European Union.

This means that the transformation Apple has been gradually implementing since the Digital Markets Act came into effect has reached a measurable scale. Until now, the company has primarily argued in these disputes on the grounds of security and user experience, most recently, for example, in its opposition to the regulatory plans of the UK's competition authority. The financial impact remained in the background. Now it is documented in the minutes of a conference call.

Apple had already opened up its app stores to Brazil in June, allowing alternative app stores and its own payment methods. In the US, the issue is the commission on purchases made outside the app – a point that has been disputed for months in the lawsuit against Epic.

The App Store still set a record

However, a closer look at the other figures prevents an overly simplistic narrative. According to Apple, the App Store achieved a record revenue for a third fiscal quarter in June. Cloud services, video sales, payment services, and advertising also saw double-digit growth; the company reported a record number of users for Apple Pay. The number of paid subscriptions, at over 1.5 billion, is also at a new high, as is the number of actively billing accounts.

Regulation is therefore one of several factors, not the dominant one. Anyone who interprets this conference call as suggesting that the DMA is costing Apple its services business is exaggerating – Apple itself mentions weaker mobile games and exchange rates in the same breath. The statement remains noteworthy nonetheless, because it acknowledges the magnitude of the issue for the first time.

What this means for the EU market

For users in Germany and Austria, this development is ambivalent. Lower fees for alternative marketplaces generally mean more choice and potentially cheaper apps. At the same time, Apple's argument shows that the company sees this opening up as a loss of revenue – and is seeking compensation elsewhere, for example through subscription prices or new paid tiers.

Switzerland is not subject to the DMA regulations because it is neither a member of the EU nor the EEA. The App Store there will remain in its current form, with the familiar commissions and no alternative marketplaces. The overview of functional differences within the Apple ecosystem details the practical implications of this.

The pace will remain the same in the September quarter

For the current quarter, Apple expects growth in its services segment to remain at a similar level to last quarter, excluding the currency effect of approximately 2.5 percentage points. No acceleration is anticipated. Whether the Supreme Court actually accepts the appeal in the US case is likely to have a greater impact on the division than any single product announcement this fall. (Image: Shutterstock / DenPhotos)