Apple’s Big Show May Not Be Enough

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As

Apple Inc.

AAPL 1.90%

looks to rally its base, the fate of the company’s lucrative ecosystem has never been more out of its hands.

Apple kicks off its Worldwide Developers Conference on Monday. The event typically drew developers by the thousands to the company’s Bay Area home base before the pandemic, though it will remain virtual this year with massive in-person gatherings still out of vogue in California. Either way, the event allows Apple to keep developers enthusiastic and on pace with the clockwork-like updates to its platforms, which in turn drive the appeal of its devices and fuel a services business now generating more than $60 billion in annual revenue for the company.

But any new features the company adds to the 15th version of its iPhone operating system or its other platforms will likely take a back seat to the bigger questions now facing Apple and its management of the so-called walled garden of its ecosystem. The company has been sued for alleged anticompetitive behavior by “Fortnite” maker Epic Games over the rules for its App Store. A bench trial on the matter wrapped up last week.

That trial ended with Apple Chief Executive

Tim Cook

facing sharp questions from U.S. District Judge

Yvonne Gonzalez Rogers,

who seemed skeptical about some of the company’s explanations for its business practices on the App Store. Those include technical measures preventing users from downloading apps from other sources and rules preventing developers from offering in-app purchases outside of the company’s own payment system, which generates important commissions for Apple.

A ruling on the case isn’t expected for months, but investors seem somewhat concerned. Apple’s share price has fallen 3% since the start of the trial and is now off nearly 7% for the year—the worst performance among its megacap tech peers. Part of that can be chalked up to worries about a peak iPhone cycle following the strong sales performance of last year’s models. But the App Store is a crucial business for Apple, acting as the largest driver of growth for its services arm that in turn commands much higher profit margins than sales of its devices. Apple doesn’t break out results for the App Store, but Judge Gonzales Rogers—who has access to financial information filed under seal—described the business as “quite lucrative” in her grilling of Mr. Cook.

Apple’s way forward may involve making that business less lucrative. That could come from even sharper reductions to its commission rate than past cuts have caused, or through more fundamental changes such as allowing in-app purchases outside of its payment system.

Such changes would represent a major shift for the company. “We are creating the entire amount of commerce on the store,” Mr. Cook said on the witness stand. Indeed, Apple released an “independent study”—which it paid for—Wednesday that estimated billings and sales facilitated by the App Store totaled $643 billion last year. That generous figure includes sales that take place over apps that generate no commission for Apple, such as household goods ordered over the

Amazon

app.

By contrast, Judge Gonzales Rogers even questioned Apple’s role in game transactions that do make up the bulk of App Store revenue, which analysts estimate at about $20 billion for the trailing 12-month period ended in March, according to Visible Alpha. She observed that “after that first interaction, developers are keeping their customers. Apple is just profiting off that.”

All the fans cheering Apple on next week may not be enough.

The latest update to the iPhone’s operating system features a new privacy feature called App Tracking Transparency. WSJ’s Joanna Stern spoke exclusively with Apple’s Craig Federighi about the decisions behind the feature, as well as Apple’s interest in mixed reality—and the possibility he’ll replace Tim Cook as CEO. Photo illustration: Alex Kuzoian for The Wall Street Journal

Write to Dan Gallagher at dan.gallagher@wsj.com

Epic vs. Apple

Related coverage of the dispute, selected by the editors

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