Yahoo Finance 1 More Way Apple Undermines App Store Competition
Antitrust scrutiny of Apple's (NASDAQ: AAPL) App Store has been heating up quite a bit so far this year, with regulators and lawmakers the world over taking a closer look at how the company conducts itself on its own platform following complaints from third-party developers. Apple's defense has been to point to what it characterizes as vibrant competition, noting that there are ample alternatives to its first-party offerings. But the issue has never been whether there is competition, but rather how the tech titan competes.
Here's one more way that Apple may be undermining App Store competition.
Image source: Apple.
Showing up first
The Wall Street Journal published an analysis this morning that suggests Apple favors its own apps in App Store search results. That includes showing up at the top of 60% of simple queries and 95% of searches for apps that sell subscription-based services and digital content, according to the report.
For example, Apple Maps ranks first when searching for "maps," and Apple Music is listed at the top of a search for "music." The company's search ranking algorithm is largely a black box, but factors in data points such as the number of downloads and user ratings. However, Apple does not allow ratings of its own apps and many of its apps come pre-installed on iPhones and iPads, calling into question how it could organically rank first in search results.
"Apple customers have a very strong connection to our products and many of them use search as a way to find and open their apps," the Mac maker told the Journal. "This customer usage is the reason Apple has strong rankings in search, and it's the same reason Uber, Microsoft and so many others often have high rankings as well." That suggests that another input that Apple could be factoring in is local on-device searches that users may use to open apps on their iPhones. The report notes that Apple's search algorithm uses 42 different inputs.
Of course, Apple maintains that it doesn't unfairly favor its own apps and services, instead saying its search algorithms leverage machine learning and artificial intelligence to determine relevance. Rankings can and do change over time.
Boosting the search ad business
One potential side effect of Apple allegedly favoring its own apps is that third-party developers are incentivized to buy App Store Search Ads, which are expected to be a $2 billion business by 2020, according to estimates from Bernstein analyst Toni Sacconaghi. Search Ads generated $1 billion in revenue last year, according to WSJ.
That would parallel what's happening on Amazon.com (NASDAQ: AMZN), which is also under increased antitrust scrutiny. The e-commerce giant has similarly been aggressively growing its own search ad business, and often features its own products at the top of search rankings on its platform. Amazon recently pulled back on promoting its private-label brands earlier this year following pushback.
I will keep shouting that Amazon's "advertising" business isn't advertising but a tax on merchants who sell on Amazon. Pay up, or your products are invisible. https://t.co/gZzgNypXW4
— Shira Ovide (@ShiraOvide) September 19, 2018
Apple has already demonstrated that it is exempt from many of the App Store guidelines that apply to third-party developers, undermining competition in the process. Potentially gaming App Store search rankings will only add fuel to the antitrust fire.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, and MSFT. The Motley Fool has the following options: long January 2021 $85 calls on MSFT, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends UBER. The Motley Fool has a disclosure policy.
