BofA: App Store Litigation Could Impact Apple's 30% Developer Commission

Apple Inc. AAPL is defending a lawsuit dealing with the Apple Store consumers' ability to sue the company. A Supreme Court decision in the case could affect Apple's share price, according to Bank of America Merrill Lynch. 

The Analyst

Analyst Wamsi Mohan maintained a Neutral rating on Apple with a $220 price target.

The Thesis

The company argues that the App Store is a two-sided market that connects both developers and consumers, in which the developer sets the price and produces the applications, Mohan said in a Monday note. (See the analyst's track record here.) 

“On the other hand, the lawsuit contends that Apple is able to use its market presence to unfairly raise prices of apps. By limiting users to buying apps only from its App Store, deciding which Apps can be sold and having influence on the price at which apps are sold, Apple becomes the entity with which consumers deal with.”

The lawsuit contends that consumers indirectly pay for the 30-percent commission Apple charges developers in the form of higher app prices, the analyst said. 

Since the App Store is estimated to represent over 30 percent of Cupertino's total annual services revenue, every 5-percent drop in the developer commission rate dents App Store revenue by 17 percent, Mohan said. This translates to a 24-cents-per-share annual EPS impact, he said.

BofA does not anticipate a simple or quick resolution.

“Anti-monopoly law allows direct purchasers of a product to sue a company violating the law,” Mohan said.

“The court’s decision in this case could potentially have ramifications for other such marketplaces as well as other companies. The Supreme Court is deciding whether to allow the suit to proceed. If it is allowed to proceed, media reports indicate the court will render a ruling by June.”

Price Action

Apple shares were trading down nearly 1 percent at $172.93 at the time of publication Tuesday. 

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Photo courtesy of Apple.