Apple Inc. (AAPL) Stock: App Store Changes Reveal Critical Concern

Apple is venturing into uncharted waters as the iPhone's impact shrinks

Those of you who are regular users of the Apple Inc. (AAPL) App Store, searching for the latest and greatest digital media to add to your iPhone, are about to see some changes to the site’s look, feel and function.

For most owners of iPhones, the changes to the App Store won’t initially seem like a big deal. They are significant though.

More than that, to owners of Apple stock, the changes are a red flag of a brewing headwind that may well stymie revenue and earnings in the future. It just takes a more philosophical, bigger-picture look to accept the reality.

Meet the New App Store

While many of the changes have yet to be implemented yet, they were unveiled on Wednesday.

Among the biggest overhauls to the App Store are advertisements from app developers promoting their own apps. While this in theory opens the door of equal treatment for any app developer, most developers agree that it favors the bigger, more established app developers with deeper pockets. Newcomers and small players will struggle to be found without a lot of luck.

Another change iPhone users will see: More and more apps added at a faster pace. Without explaining exactly how, Apple said it had accelerated its approval process for apps, as if the 1.9 million apps available already aren’t enough.

The Good, the Bad and the Ugly

On the surface, the news seems like a real win for Apple, and by extension a potential boost for the value of AAPL shares. And in many regards, that’s the case. Though the App Store hasn’t historically been a major component of Apple’s revenue model, last year, App Store revenue grew 35% … and that was before the latest revamps. With the latest round of enhancements about to be put in place, the App Store’s revenue growth could accelerate before decelerating.

And yet, there’s reason for concern.

Though the changes are specific, in a broad sense, the latest batch of changes suggest a “let’s throw all the spaghetti on the wall and see what sticks” mindset. The App Store was cultivated as a democratic means of finding apps. For the first time though, ads will appear at the app store, monetizing a function that some would say shouldn’t be monetized, and doing so in a way that some would say it shouldn’t be done.

It’s not just the fact that visibility in the app store can now be bought rather than earned, however. Apple has incentivized sales of subscription-based apps, without doing to the same for apps that incur a one-time fee. Specifically, rather than taking its usual 30% cut, Apple will reduce its take to 15% after a user has been a subscriber to an app for more than a year.

Such an arrangement favors the push of more subscription-based apps, for developers as well as for Apple. It could adversely impact the sales of one-time-purchase apps.

Sooner or later, all of these changes may make the App Store too frustrating to use.

None of the shifts are immoral changes, mind you. Indeed, most would agree it’s just good business sense to monetize something that can be monetized, particularly in the shadow of news that global smartphone sales are slowing for saturation reasons, and the upgrade cycle is slowing.

These changes do mark, however, Apple’s transition from being a maker of the world’s best hardware to a media company that also happens to make hardware. It’s no minor shift, and it’s not a business Apple has been adept with yet. That makes it vulnerable.

Bottom Line for AAPL Stock

It’s always dangerous to critique Apple, as AAPL stock is ubiquitously owned and vocally defended by more than a few people who’ve put Apple on a pedestal. To that group, none of the above is to suggest Apple won’t be around five years from now. It will be around five years from now, and most likely it will still be a solid company.

It is to say, however, this seemingly small change with the App Store is a microcosm of a much bigger paradigm shift to a focus where Apple may not be as fierce of a competitor; a lot of people sell digital media.

And that IS a reason for the true AAPL long-termers to at least consider taking AAPL stock off the pedestal and looking at it with a devil’s advocate point of view.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/apple-app-store-aapl-stock-shift/.

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