Are Investors Ignoring a Real Risk to Apple's Future?

Apple (AAPL -1.14%) is a company that seems to have everything going for it. After blowout earnings , nothing should stand in the way of investors enjoying the ride to new heights.

However, Congress has its sights set on several big technology companies, and no matter the market capitalization, the government is bigger. Apple hasn't grown by making huge acquisitions. The company doesn't completely dominate a system like Amazon.com's (AMZN -2.42%) lead in e-commerce. However, Apple's App Store seems to be a real antitrust risk that few are taking seriously.

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There are four companies being targeted by Congress for antitrust concerns: Alphabet (GOOGL -0.70%) (GOOG -0.63%), Apple, Amazon, and Facebook (META -1.95%). The central theme of the hearings centers around what, if any, unfair practices each of these companies might be engaged in.

Image Source: Getty Images.

Daniel Roberts of Yahoo Finance concluded that "Apple in particular, has reason to be the most unbothered of the four when it comes to lawmakers threatening antitrust action." His conclusion is based on the idea that outside of Apple, the other companies have made significant acquisitions, or they clearly dominate a certain business. Theoretically, the government could force these Goliaths to divest previous acquisitions or to change their business model.

What seems to be missing in these arguments is the fact that a monopoly doesn't have to come about from an acquisition. A near perfect example is Microsoft's (MSFT -1.28%) antitrust issues in the 1990s . The company dominated PC operating systems and included Internet Explorer with each copy of Windows. A federal district judge ruled that this tying practice was unfair, and Microsoft should be split into two different companies. If not for this decision being reversed by a higher court, today's Microsoft might be a quite different company.

According to Investopedia, a monopoly is "characterized by the absence of competition, which can lead to high costs for consumers, inferior products and services, and corrupt behavior." Another definition says, "it can impede new entrants into the field, discriminate and inhibit experimentation or new product development."

Most antitrust issues are decided based at least partially on the Sherman Antitrust Act . The Act says that "only unreasonable restraint of trade through acquisitions, mergers, and exclusionary tactics" constitute a violation. The end of this statement -- exclusionary tactics -- is what should worry Apple investors.

One of these things is not like the others

Of the four companies in the sights of the government, there seem to be some obvious differences when it comes to antitrust risk.

(Source: Investopedia. Table by author.)

The list above isn't meant to be exhaustive, yet we can see a clear difference between the four companies. In traditional search, Google may be the leader, but Facebook received 1.5 billion searches every day last year . In addition, Fool.com contributor Adam Levy reported multiple times that more consumers start their online shopping search on Amazon than anywhere else.

When it comes to Facebook, the pandemic driven user growth from Twitter  (TWTR), Snapchat  (SNAP -0.16%), and Microsoft-owned LinkedIn likely helps fend off regulators' worries. Looking at Amazon, since first quarter 2017 , at least 50% of Amazon's unit sales have come from third-party sellers. This would seem to argue against the e-commerce giant being anti-competitive.

Where Apple is concerned, there is no other way to download and install an app on an iOS device. If a lack of competition constitutes a monopoly, this could be a problem for the company.

Breaking a monopoly?

Looking at how the App Store works, the facts seem to stack up against Apple. First, Apple is the sole decider of what apps are allowed into the store . According to the company, 60% of the apps are approved, yet 40% are rejected for "minor bugs, followed by privacy concerns."

Second, Apple takes a commission of 15% to 30 % depending on the situation. With no other option, developers either pay or lose access to millions of iOS users. Apple goes out of its way to say that 84% of its apps are free and developers pay nothing. However, there is a $99 annual fee to be part of the Apple Developer Program .

Third, there are examples of companies with brand recognition being able to bypass the Apple toll, but smaller developers don't have a choice. For instance, the email app Hey charges $99 annually, but didn't offer an option to pay through the App Store . Apple reportedly told developers to add an in-app subscription option or face the app being removed.

By contrast, Netflix (NFLX -0.29%) and Spotify (SPOT -1.07%) no longer allow customers to sign up for their service through iOS to avoid paying Apple's fees . It seems the App Store is the very definition of a monopoly. If the government decides this is the case, the Apple of today could be vastly different than the Apple of tomorrow.

Last quarter, Apple generated $13 billion in services revenue, which generated a gross margin of more than 67%. However, a strong antitrust action could change some of the math. Apple Music costs about the same as its competition, yet Apple doesn't have to pay a 15% to 30% commission to sell its own service. Other services like Apple Arcade, Apple News+, and Apple TV+, have the same built in advantage.

Antitrust action could force Apple to spin off the App Store, or at least open its ecosystem. Opening its App Store to competition would mean having to charge less to app developers to effectively compete. This action would potentially slow revenue growth and compress margins. A full spinoff would mean Apple would be required to pay a commission for its services, like Apple Music, that have gotten a free ride so far.

With Apple shares trading at a forward P/E ratio of more than 33 , they can't really be referred to as a great value. Analysts are projecting just 5% annual EPS growth over the next few years.

It's difficult to gauge how Apple ultimately be affected by ongoing antitrust concerns. However, investors should be aware of this risk to the company's future, and adjust their expectations accordingly.