Apple's Biggest Loyalty Challenge Awaits

Apple has a devoted following that is unparalleled among tech companies.

The last few months have been a challenge for those who have faith, and the upcoming year could be even more difficult.

Since the beginning of November, those looking to purchase the two iPhone 14 Pro models have experienced longer than usual wait times. This is due to the Covid-19 lockdowns and the social unrest in China, which has caused a disruption in production at the facility where the devices are assembled. Apple is also reportedly making changes to its software to comply with a new European Union law that was implemented this year, allowing apps to be downloaded to iPhones and iPads outside of the App Store.

The potential effects of these two advancements could be significant for Apple's two main divisions. The iPhone and Services divisions, which includes the App Store, made up 72% of the company's total income in the last fiscal year.

Visible Alpha's consensus estimates report that the App Store generates close to $24 billion in revenue annually. This is almost double the amount of revenue that analysts estimate for Google Play, which is the main app store for the Android platform that is used on nearly three-quarters of the world's smartphones, as reported by Statcounter.

The iPhone production issue is a temporary problem, but it could have long-term consequences. According to a report from UBS analyst David Vogt on December 13th, the wait times for U.S. orders have decreased from 40 days to 23 days. However, this still means that many orders placed in December will not be delivered until 2023, which increases the possibility that some customers may choose to purchase from another company.

Mr. Vogt reduced his projections for iPhone shipments for both the December and March quarters, and decreased his goal for the fiscal year ending in September by seven million units. He commented that the current disruptions are not similar to past shortfalls in demand that caused perishability.

Despite the recent production issues in China, Wall Street's consensus target for iPhone revenue in fiscal 2023 has only decreased by 1%. This will depend on the resolution of the production issues for the Pro models, which are highly sought after due to their advanced camera and processor. UBS has reported that the two less expensive iPhone 14 models have near zero wait times in the U.S.

Retaining the loyalty of iPhone users is one challenge, but keeping them within the Apple environment could be another. The potential changes due to EU legislation would enable iPhone and iPad users to download apps from sources other than the App Store, a process known as sideloading. These apps could potentially bypass Apple's regulations and payment system, which charges up to 30% of transactions.

Apple's practice of controlling its own platform has become a highly debated topic. The company has maintained that its "closed ecosystem" approach is the best way to protect users from malicious apps and guarantee a positive experience.

Permitting sideloading could be a good way to test customer opinion, and it is likely that many will be in favor. A survey conducted by Morgan Stanley revealed that only 27% of iPhone owners stated they were "extremely likely" to buy an app directly from a developer's website instead of using the App Store. Apple could still impose other regulations on developers who bypass the App Store, such as additional fees, which would offset the loss of commission. Erik Woodring, a Morgan Stanley analyst, wrote in a Dec. 14 report that "We believe alternative app stores could introduce a larger cost burden on developers."

It is uncertain what Apple will do in response to the EU law and how far-reaching the modifications will be. According to the Wall Street Journal, Apple is currently considering whether the sideloading changes should be restricted to Europe or implemented worldwide.

The former would be manageable according to Mr. Woodring, who estimates that the total company revenue would only be affected by 1% if App Store revenue from Europe was completely lost. Apple is known for being careful with their finances, so it is unlikely that they would let this go without a fight.