One of Apple‘s (NASDAQ:AAPL) key advantages is iOS, its closed-source operating system. This proprietary software gives the company a great degree of control over its hardware ecosystem, including the ability to determine which apps can be installed on its devices. And because those apps (and in-app purchases) can only be transacted through the App Store, Apple is able to take a cut of every transaction (up to 30%).
Of course, this doesn’t sit well with many businesses. And after Fortnite was booted from the App Store, developer Epic Games sued Apple, alleging its business model constitutes an illegal monopoly. Ultimately, the court delivered a split ruling: Apple must allow other payment options, meaning it cannot mandate that in-app purchases take place through the App Store, but the App Store itself does not give Apple monopoly power.
In this Backstage Pass video, which aired Sept. 14, 2021, Motley Fool contributors Jason Hall, Demitri Kalogeropoulos, and Trevor Jennewine discuss three stocks that should be just fine regardless of what happens with the App Store.
Jason Hall: I think the more interesting thing is to talk about just some of our best ideas for companies that are tied to the app economy, whether it’s iOS and the App Store there, or whether it’s over on [Alphabet‘s] Google. But companies that should be winners no matter what happens next with Apple and the App Store. Demitri, you want to kick us off here?
Demitri Kalogeropoulos: Sure, yeah. I really like Activision Blizzard (NASDAQ:ATVI) right now. It’s an exciting story that’s getting more into the mobile world in really interesting ways. Traditionally, it’s very much of PC and gaming platform company. Today, I just double-checked, they have two of the top 10 highest grossing games in the Apple iOS store right now and that’s Candy Crush and Call of Duty Mobile and neither of these were really on investors’ radar just a couple of years ago when Activision bought King Digital and then its recent push into mobile and free-to-play gaming.
What’s exciting is that Activision has hit on something really big with its free-to-play approach and what they’re doing is using things like these free mobile games and their Battle Royale mode to expand the gaming universe for Call of Duty and it’s working really well. I was rereading some of the stats recently and today, gamers are spending four times more money within the Call of Duty ecosystem than they were in 2019, right before the pandemic and that’s even after it slowed down the past last few months, lately since the pandemic boost. That approach has worked really well and Activision is not just resting on that.
They’re going to use it with other brands and they’re doing that with their Diablo franchise. This year, I think, they’re hoping to get a mobile game out for that and they’ve got probably dozens of these other brands that they can use that same approach to expand the base and use that to introduce people into the brand and then continue to offer these premium games like the new Call of Duty that’s coming out in November. That’s going to launch the biggest pool of engaged Call of Duty gamers in history and that can only help the stock.
Jason Hall: It’s funny too, you go back five or six years ago, Demitri, I know this is a company you’ve followed for a long time. But you go back then and there were still a lot of question whether or not anybody could really make money consistently in mobile gaming and the story has completely changed.
Demitri Kalogeropoulos: It’s also really interesting to see how much games have changed in terms of the profit, how they make money now in just last three years, maybe. Three years ago, you would pay and spend $60 on a Call of Duty game in November, and then you’d spend another $60 the next November, for example. If you had one release, you had one chance, you had two weeks, it was a bad Christmas holiday, that could’ve tanked your whole earnings. But now, it’s this whole software-as-a-service thing where people are signing up for monthly subscription season, different seasons, and there’s constant content.
One brand, one game last way longer than a year, and as you see, I haven’t really double-checked the list, but there’s some games for like four or five years ago in Activision’s portfolio today that are just still just getting a whole lot of engagement and a whole lot of monetization. It’s amazing how much more valuable games are right now.
Jason Hall: Trevor, I like the direction you’re going with this for the company that frankly just didn’t even enter into my mind when I thought of this idea for a topic. Well done.
Trevor Jennewine: Yeah. I’m going to go with Sea Limited (NYSE:SE). Sea Limited actually started as a gaming company, Garena, and Garena’s claim to fame is probably Free Fire, which is the top-grossing mobile game in Southeast Asia, Latin America, and India right now. It is also, let’s see here, according to Sensor Tower, is number three on the list of top downloaded mobile games worldwide and it’s number six on the list of top-grossing mobile games worldwide. Very popular game. It’s available through iOS and Android; and the reason I think this company will be OK with or without the App Store, is it does very well on Google Play, first of all, and the company also has two other segments.
It does use its game to sometimes offer advertisements to bring customers over to its e-commerce marketplace, which is Shopee, and then its e-commerce marketplace uses SeaMoney, which is a fintech platform. It’s really an ecosystem. It’s in the video games space, it’s in the e-commerce space, it’s in the digital payments space, and I think the company’s other applications like Shopee and SeaMoney have gained so much traction in Southeast Asia that — even if things went terribly wrong with the Apple App Store — they would still have a big enough user base. They’re still growing so quickly that the company would be fine.
Jason Hall: I’m going to cheat a little bit and I’m actually just going to go with Netflix (NASDAQ:NFLX) here because I think one of the things that you see with companies when they get to a certain level of scale, all of a sudden, their leverage situation changes. Although with a lot of these smaller companies, Apple has all the leverage, and if you’re a small app developer, you love the facts that Apple’s going to take care of collecting the money anyway. You can build a business based on having access to hundreds of millions of people and then Apple just takes care of all of the financial aspects of all of accounts payable. [laughs] It just comes in and they handle it. You take that negotiation, but when you get to a scale of somebody like Netflix, your leverage and the rates that you might necessarily be paying or sharing completely change and you have the ability to have one-off agreements that might be different. I think that scale is really powerful and really important because Netflix doesn’t need the App Store. It’s great to have, but it’s at a point where its scale is big enough that that doesn’t matter.
I’ll go with Netflix, and Demitri, I’ll just refer to the case you made earlier for this. Why is it going to be a winning investment? All of the trends are in its favor. It has massive data. It’s spent a ton of money already to develop content. It’s monetizing that content. The data tells it what content to develop next. It’s just in such a winning position and the economic model, and the cash flows that it generates are quite good.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.