The $6 Billion Record Fine Is Likely But I’m Buying More Apple Shares – Seeking Alpha

I. Introduction

Given my profession as a lawyer for Antitrust & Competition in one of the biggest law firms of the world, I am very sensitive to possible regulatory threats for companies (regardless of whether I think it is right and fair or not, because an investor has to react to reality, not to his own feelings).

Why am I saying this? Because readers benefit from it. When it was foreseeable that Qualcomm (QCOM) would be fined by the European Commission, I calculated the exact amount almost exactly in advance and was able to inform my readers about it.

That’s exactly what I do in the antitrust dispute between Apple (AAPL) and Spotify (SPOT), which I closely monitor as an investor. I have already presented the decisive aspects of this dispute to my readers in several detailed analyses. Apple has now officially filed a defense with the European Commission. In the following I will explain whether and to what extent my assessment has changed.

II. What happened

In March, Spotify announced that it has filed a complaint against Apple with the European Commission. Simultaneously, Spotify launched a ‘time to play fair call’. Spotify claims that Apple harms consumers and other companies because it uses power to gain an unfair advantage.

Spotify filed its complaint on five grounds:

1. Apple Charges a Discriminatory Tax.
2. If the customer chooses not to use IAP (the only payment option on iOS), Apple, bars Spotify from communicating directly with Spotify customers who access Spotify via Apple platforms.
3. Apple complicates an update of the Spotify App.
4. Apple routinely rejects bug fixes and app enhancements.
5. Apple won’t allow Spotify to be on HomePod and let Spotify connect with Siri.

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After Spotify announced it filed an antitrust complaint with the European Commission over unfair App Store practices, Apple responded two days later with a statement. It is pretty clear to me that this is not only a statement to the public. I think it already reflects the legal tactics Apple will use to defend itself against the Commission. Apple had good arguments, which are also found in the case law as justifications. However, the defensive line remained a very weak spot that could be detrimental to the company’s future business model and growth engine – the service business.

I have already presented all these aspects to my readers in several detailed analyses.

1. My first article introduced the legal framework and showed how the Commission will proceed under European competition law.
2. My second article analyzed Apple’s possible defense strategies.
3. In the last article I calculated the amount of a possible fine.

Apple has now officially filed a defense with the European Commission. Furthermore, Spotify and Apple are in talks to let iPhone users access Spotify music using Siri voice commands. In the following, I will describe how the latest developments for investors are to be assessed.

II. Importance of the investigation for the company and its shareholders

The investigation is very important for Apple. The complaint attacks a part of the future business of the company. The service business has a high priority, as it is intended to compensate for the declining sales of iPhones. Apple is investing aggressively in this service business. Apple’s services category, which includes iTunes, the App Store, the Mac App Store, Apple Music, Apple Pay, and AppleCare is now 20 percent of Apple’s total revenue:(Source: Statista)

Provided the Commission decides later this year, the Commission could decide to impose a fine on Apple. The maximum level of the fine is capped at 10% of the overall annual turnover of the company. Provided the commission decides later this year, the total turnover in the preceding business year in Europe was USD $62,420 million. Therefore, the final fine cannot exceed USD $6.242 / EUR 5,59 billion. Nevertheless, this would be the highest fine ever and more than 2% of Apple’s total turnover and almost 9% of Apple’s earnings. Apple’s profits would melt accordingly around nearly a tenth.

III. Apple’s defense – reassessing the risk

Apple’s first statement

As it regards the first statement, I saw two main arguments from Apple. The first argument is based on the fact that the App Store offers a platform that benefits consumers as well as other developers. With the second argument, the company says that the App Store promotes competition. According to the Official Journal of the European Union, the Commission will examine claims put forward by a dominant company that its conduct is justified. Apple would have to provide all the evidence necessary to demonstrate that the conduct concerned is objectively justified. In this context, the company is generally be expected to demonstrate, with a sufficient degree of probability and on the basis of verifiable evidence, that the following cumulative conditions are fulfilled:

1. The efficiencies would have to be realized, or be likely to be realized, as a result of the conduct in question;
2. The conduct would have to be indispensable to the realization of those efficiencies;
3. The efficiencies would have to outweigh any negative effects on competition and consumer welfare in the affected markets; and
4. The conduct must not eliminate all effective competition.

Overall, I do not see efficiencies when it comes to unequal treatment, because how is it more efficient to treat companies differently? Apple has not yet demonstrated that this behavior may be counterbalanced, outweighed even, by advantages in terms of efficiency that also benefit consumers. But as stated before, that’s exactly the company’s job.

Apple’s latest statement

According to the new Apple statement, Spotify pays Apple a 15% fee for only about 0.5% of its paid members. Furthermore, Spotify doesn’t currently pay the highest fee of 30% on any of its members.

There’s a simple reason why Spotify pays such low fees. Spotify pulled out of in-app purchases in 2016. Therefore, the company does no longer acquires customers through its iPhone or iPad apps. In this respect, the following considerations should be noted. First of all, an infringement of antitrust law does not depend on damage to an undertaking. Even if Apple could prove that Spotify would not suffer any damage, this does not have to rule out a fine. EU competition law only prohibits the abuse of this position (as well as the US-american competition law). Therefore, Amazon as a possible dominant company is entitled to compete on the merits as any other company. The purpose behind Art. 102 TFEU is that, however, a dominant undertaking has a special responsibility not to allow its behavior to impair genuine, undistorted competition on the internal market. Hence, companies with a dominant market position have some responsibility under competition law.

Furthermore, Spotify has also based its complaint on other grounds:

1. …
2. If the customer chooses not to use IAP (the only payment option on iOS), Apple, bars Spotify from communicating directly with Spotify customers who access Spotify via Apple platforms.
3. Apple complicates updates of the Spotify App.
4. Apple routinely rejects bug fixes and app enhancements.
5. Apple won’t allow Spotify to be on HomePod and let Spotify connect with Siri.

Apple denies these allegations but could not refute these complaints with the new statement. I do not see efficiencies when it comes to such a behavior. The risk of market abuse therefore continues to persist. That Spotify and Apple are in talks to let iPhone users access Spotify music using Siri voice commands does not change my assessment. It only ends the period of violation of competition law which is relevant for the calculation of the fine.

Even if I still consider a fine to be probable, one must be able to correctly assess such a fine and its potential impact as an investor. I have a pretty concrete approach to such threats. Given that one threat does not necessarily weigh as much as another threat, investors have to perform very thorough due diligence. The decisive factors are the business models and how these business models would react to antitrust regulation. Given that, this fine will only be a one-time charge. It will considerably hurt the profit for one year, but beyond that a fine will have no further effect. Apple is also liquid enough to pay the fine. Net cash totaled USD 102 billion at the end of the quarter and Apple still plans to eventually become net cash neutral. While the payment of fines is obviously not included, it shows that such a fine will not put Apple in financial difficulties.

IV. Investors takeaway

My assessment has not really changed as a result of the new developments. That Apple will be fined a record fine of more than USD 6 billion is still not unlikely. Nevertheless, the Commission has to consider a lot of different legal questions. It is quite certain that fact-finding and legal review will take some time to evaluate and define the market. Especially the market definition of the relevant product market for software solutions and/or apps platforms could be crucial, as Apple has a lot of different market shares there. Hence, a decision in 2019 is unlikely. The current investigations are therefore expected to take some time. However, the following effects have to be considered:

• The longer the investigation takes, the more money Apple will need for legal assistance.

• With each year in which Apple does not change its practice and at the same time generates more sales, the fine can increase.

It’s possible that this will weigh on the share price like a sword of Damocles.In addition, there are the impacts of the trade dispute with China. In the long run, however, I will remain bullish and will use price setbacks to buy more Apple shares.

I look forward to discussing this dispute with you in more depth in the commentary section.

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Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.