Apple Faces ‘Meaningful Risk’ From Spotify’s Antitrust Attack

(Bloomberg) -- Apple Inc. is facing “meaningful risk” from an antitrust complaint filed by Spotify Technology SA that has “significant merit,” according to KeyBanc Capital Markets.

Spotify on Wednesday said European antitrust regulators should probe Apple over how it treats rival music-streaming services. Apple shares have pared an earlier gain of as much as 1.3 percent after touching their highest since December. Spotify was little changed, while the Nasdaq 100 index gained 1 percent.

“The complaint claims Apple forces higher prices for comparable services by requiring use of its payment terms, and limits companies’ ability to market, promote and upgrade users within their apps,” KeyBanc analyst Andy Hargreaves wrote in a note to clients. “Spotify is largely on the right side in both facts and principle, which creates risk that App Store policy terms will be forcibly changed in a way that negatively impacts Services revenue and Apple’s brand.”

KeyBanc estimates that Apple will derive $13.4 billion in revenue from its App Store in 2019, accounting for 12 percent of its gross profit, as well as 30 percent of the company’s total Services revenue -- seen as an increasingly important part of its business.

“Any meaningful change to App Store payment and communications terms could meaningfully affect Apple’s Services growth rate and its EPS and cash flow,” wrote Hargreaves, who rates the iPhone maker at the equivalent of hold. “An antitrust investigation would drive an extended period of news headlines that risk sullying the brand. This could dampen pricing power or negatively impact Apple’s retention rate at the margin.”

Antitrust issues have been in focus over the past week, after Senator Elizabeth Warren -- a Democrat who is running for president -- announced a plan to break up some of America’s largest technology companies. On Wednesday, Warren told MSNBC that companies such as Apple that provide sales platforms shouldn’t be allowed at the same time to sell on those platforms and should be forced to choose one or the other.

Despite recent gains in the stock, Apple investors have continue to field notes of caution about the company’s critical iPhone line. On Tuesday, Longbow Research wrote that the product’s demand trends were going “from bad to worse,” largely due to weakness in China.

©2019 Bloomberg L.P.