Back to top

Image: Bigstock

Apple (AAPL) Slashes Subscription, Launches App Store Ads

Read MoreHide Full Article

In the run up to its annual WWDC conference that begins in San Francisco next week, Apple Inc (AAPL - Free Report)  has announced several strategic changes to its App Store.

The company’s senior vice president of global marketing and head of App Store, Phil Schiller, in an interview with The Verge, revealed that the company will slash its fees from app developers who can retain subscriptions for the long term.  At present, developers and Apple have 70:30 revenue split agreement but from now on if an app developer can retain customer subscriptions for more than a year, Apple will halve its share to 15%. The option will not be limited to selected apps but will be extended to all the apps including games, which contribute a major chunk of iOS App Store revenues.

Moreover, following the footsteps of Alphabet (GOOGL - Free Report) that generates revenues from its Play Store business by showing ads, Apple will now start displaying ads in App Store search results. However, Apple is treading cautiously and will currently display a single ad per search. The ad will appear right at the top of the search results and will be marked blue. Schiller said that "We’ve thought about how to carefully do it in a way that, first and foremost, customers will be happy with."

Schiller also added that Search ads will be “"fair to developers, and fair for indie developers, too". He further said that the company is stressing on improving search tool efficiency so that small developers aren’t overshadowed by big and popular developers.

Apple is also accelerating its app review process. From now on, 50% of the apps will be reviewed within a day of submission while 90% will be reviewed within 2 days.

The current changes to App Store can easily be labeled as some of the biggest since its launch in 2008. The changes are prompted by waning sales of Apple’s flagship product – iPhone.

iPhone has been Apple’s biggest revenue driver. However, since the last two quarters, the demand for these devices has been weaker than anticipated owing to global macroeconomic weakness, especially due to currency volatility and declining commodity prices in some key regions across the globe (about 67% of Apple revenues come from International markets). The concerns stem from the fact that iPhone alone contributes about 65% (in the second quarter of fiscal 2016) of Apple’s total revenues. 

As a result, the company is now looking to other revenues to drive its top line. The App Store business, just a year younger to iPhone, emerges as a good bet. As per Apple, annual billings in 2015 from the store topped $20 billion, contributing $6 billion to overall revenues given the 70/30 revenue split. This makes it imperative for Apple to keep the developers happy.

For some time now, there has been much noise from the developers’ end regarding their sustainability issues. Small developers have been grumbling about the hefty rates that they have to pay to Apple.

The Wall Street Journal observes that these changes are in the right direction if Apple isn’t willing to lose developers to its rival and a much more pervasive Alphabet’s Android system that currently powers 75% of the smartphones in the world.

Apart from the App Store, Apple is also betting high on its other offerings like Apple Pay, Apple Watch, Apple Music and Apple TV. The Cupertino-based tech behemoth is also exploring new potential markets like India apart from U.S and China, to boost its sales.

However, for the time being, we remain cautious as macroeconomic conditions continue to be volatile and the smartphone market experiences weakness. At present, Apple carries a Zacks Rank #5 (Strong Sell).

Stocks to Consider

Better-ranked stocks in the broader technology space are Facebook Inc. and  Elli Mae Inc . Both sport a Zacks Rank #1 (Strong Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Apple Inc. (AAPL) - free report >>

Alphabet Inc. (GOOGL) - free report >>

Published in