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Large fines can sometimes have a bracing effect on share prices. Facebook shares jumped after a record-breaking $5bn fine from US regulators in 2019. Alibaba shares rose after Chinese regulators fined Ant Group. Penalties often end uncertainty about the outcome of investigations. On Monday, however, Apple’s first EU antitrust fine prompted the share price to drop 2.5 per cent.
At first glance, the €1.8bn fine for stifling competition in music streaming is not a lethal problem for the company. It is pocket change when compared with Apple’s global sales, equal to about 2 per cent of last year’s annual free cash flow. Appeals mean the case will be in court for years. Apple can argue that its own music service does not dominate the market.
The problem is that the EU fine does not mean the end of Apple’s regulatory battle. Around the world, more attempts are being made to put limits on tech company power. Slowly, Apple’s closed ecosystem is being chipped away.
Later this week, the European Union’s Digital Markets Act comes into full effect, forcing companies to do more to ensure competition. Apple has already made concessions. It will allow users in Europe to access rival app stores and payment systems on smartphones and tablets, for example, in a process called sideloading. Companies that violate the new EU law face fines of 10 or 20 per cent of their global revenue. For Apple, that would be $77bn.
Enforcement in one jurisdiction can embolden greater antitrust scrutiny elsewhere. In the US, Apple’s largest market, the company is under investigation by the justice department. An antitrust lawsuit could soon be filed.
So far, the changes that Apple has made to mollify regulators have had no noticeable impact on services revenue, which includes app fees. This has jumped 78 per cent since 2019. Like its Big Tech peers, the company has faced regulatory action in the past without upending the way it does business. In 2016, the European Commission ordered the company to pay billions of euros of back taxes. Its effective tax rate has fallen since then.
What is different this time is the volume of action on multiple fronts and the fact that they coincide with a period of slowing growth. High-margin services revenues have bolstered net income even as slowing smartphone sales drag on growth. This is the model that regulators have put in peril.
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