A new report on Apple (NASDAQ:AAPL) App Store spikes out the 10 highest grossing apps on the platform so far for 2018. The data shows some interesting trends, including several potential risks for AAPL. With the company increasingly looking to Services division revenue to pick up the slack from slowing iPhone sales, it’s worth taking a deep dive on this App Store top 10 list. There are trends here that could impact Apple stock in 2019.
Apple App Store Rankings Show Two Big Trends
Business Insider used data from Sensor Tower (a company that tracks the mobile app industry) to put together a list of the top 10 highest grossing iOS apps of 2018. The data covered the year up to Nov. 30, so it’s possible there may be some changes in position — and the earnings amounts will definitely increase — but two trends among these big money making apps are immediately obvious.
First, subscription-based apps are are making big money. The highest grossing iOS app for this year is currently from Netflix (NASDAQ:NFLX) with $790.2 million to date for the year. Pandora (NYSE:P) and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube are in the top 10 as well. The second big takeaway from the App Store data is the growing importance of China. Five of the top 10 grossing apps are from Chinese companies, including second place TenCent video (with $490 million), a video streaming app.
AAPL Success, But It Carries Risk
Apple is justifiably happy with the performance of the App Store. Its first press release of 2018 announced a record $300 million in App Store sales on New Year’s day alone, and $26.5 billion in earnings for iOS developers for 2017. Those are big numbers. And AAPL takes 30% of the price of apps. For subscriptions, that drops to 15% after the first year, but we’re still talking billions in revenue that doesn’t require convincing someone to spend $1,000 on an iPhone.
The App Store is a big part of Services division revenue. AAPL (and Apple investors) are looking to Services revenue to take the sting out of slowing iPhone demand, keeping Apple stock growth going.
The big Chinese presence in the list is a little surprising, given that Apple has been bouncing between fourth and fifth place as a smartphone seller in that country. However, the numbers show even fourth or fifth place in a market as big as China can have a huge impact on iOS app sales. This shows the potential for China to drive App Store revenue even higher. But it also carries the risk of that revenue drying up if the current trade war between China and the U.S. heats up.
The other problem is subscription revenue. Apple loves this. This is recurring revenue, which is why the company was wiling to knock its cut down to 15% after the first year. But companies that face paying out 15% of their revenue year after year to Apple are liable to look for ways around that situation. Netflix already tested blocking new users of its iOS app from paying for their subscription through the app. Instead, they were directed to the company’s website, bypassing AAPL’s App Store revenue cut. With subscription revenue becoming big business, there is a growing risk of this practice becoming commonplace.
In other words, the App Store might become so successful, that APPL ends up losing out on that revenue altogether.
The numbers Apple released at the start of the year show that the App Store is still a growing business, with one-off apps like games making up the majority of its revenue. However, that revenue also faces challenges. AAPL is currently fighting a legal battle at the Supreme Court level, after a lawsuit was launched alleging the App Store represents a monopoly.
Potential for the Chinese market to take a hit, temptation for big subscription earning iOS apps to circumvent in-app payment and a lawsuit over the App Store itself: these all add up to risks to AAPL Services revenue, and all seem likely to play out in 2019.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.