At the end of 2018, Apple announced that it would end the disclosure of iPhone units sold. The company said the number of units sold was no longer an important metric because the services business (app store, subscriptions, music, etc.) was the future. iPhone unit growth was of course disappointing at the time.
In other words, Apple was saying, don’t look over here where iPhone unit sales growth is slumping, instead, look over there at our shiny new services business.
Apple’s plan was to convince investors that because services revenue is more stable, it deserves a higher multiple which would of course lead to a higher share price. And despite the obvious head fake, Wall Street bought it.
Since year-end 2018, Apple’s P/E ratio on year-ahead earnings has expanded to 30X from an average of about 15X for the 10-year period ending in 2018. Revenue and net income are up about 25% over this period while per-share revenue and earnings are up closer to 50% due to Apple’s massive share buyback program.
In gross profit terms, the services business is about ten percentage points more important to Apple than it was at the end of 2018.
What does all of this have to do with North Dakota?
Well, for all the hype around the services business, a majority of its revenue comes from the App store. Apple takes an egregious 30% cut of app store revenue and then bans users from buying apps. There would appear to be some clear anti-trust violations here.
And that’s where North Dakota comes in. The NY Times reports that North Dakota is proposing a law to limit Apple’s market abuses.
North Dakota is part of a new front in the battle over Big Tech and its power. Frustrated with a lack of action from courts, regulators and Congress, tech rivals and critics are turning their attention to state legislatures, pushing bills that seek to tax the biggest tech companies, rein in their power and limit their control over the internet.
The North Dakota bill focuses on Apple’s and Google’s practices of taking a cut of up to 30 percent from many app sales on smartphones, a policy that brought the companies a combined $33 billion last year, according to estimates from Sensor Tower, an app data firm.
Some smaller companies have argued that Apple and Google force app makers to pay an artificially high fee only because of their sheer dominance. The two companies’ software underpins nearly all of the world’s smartphones.
The bill would prohibit Apple and Google from requiring apps to use their payment systems, which enable them to collect their commissions.
It would also require Apple and Google to allow users of their smartphones to download apps from outside their flagship app stores, though Mr. Davison said he was trying to remove that provision to ease some of his colleagues’ concerns. Google already allows such downloads, but Apple does not.
North Dakota’s 47 senators are set to vote on the measure this week after debate starts on Monday. The timeline is accelerated because the legislature meets for just 80 days every two years. If a majority votes aye, the bill will move on to the House.
If the bill fails, Apple and Google’s fight would appear far from over. Georgia and Arizona lawmakers are considering nearly identical app-store legislation, and Andy Vargas, a state representative in Massachusetts, said he planned to introduce a comparable bill this week. Lobbyists said they were also pushing for app-store bills in Wisconsin and Minnesota.
If states are successful at limiting Apple’s dominance in the app store, Apple’s narrative about the services business may start to look a lot more suspect. And if it’s the services business that drove the P/E multiple to 30X it could be the services business that drives the multiple right back down to 15X—shaving 50% off the share price.
