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This Could Cause Mobile Advertising Spend to Surge

Whenever someone makes a purchase on the App Store from Apple (NASDAQ: AAPL), Apple takes around a 30% cut. This is a highly profitable, multi-billion dollar revenue stream for the company that's certainly enriched its shareholders. However, mobile-game publisher Epic Games is trying to get Apple to reduce its take rate.

In this video from Motley Fool Backstage Pass, recorded on Nov. 29, Fool contributors Jon Quast and Jose Najarro talk with Fool analyst Sanmeet Deo about the topic, agreeing it's unlikely that Apple will reduce its take rate right now. However, here's what it could mean for mobile-advertising spend if Apple were to reduce its cut on transactions in the App Store.

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Jon Quast: One of the things that we've talked about in the past, of course, was Epic Games lawsuit of Apple and the implications that that might have. One thing that I think that we completely overlooked was the result of what could happen to spending from mobile game advertisers.

Here's what I mean: Right now, we've noted that Apple takes a 30% cut from purchases in its app store, and this is what Epic Games is contesting saying, "This is quite unfair. We're giving up a very large portion of our potential revenue to Apple." But it's hard to get away from that because Apple controls so much of that market, and it's basically a duopoly with [Alphabet] Google.

Imagine if that take rate was dropped for Apple or Google down from the 30% that it is today. What if it was half of that, 15%? What if it was 10%, 5%? Something way more reasonable and more in line with what a take rate is for maybe like a credit card processor for example. If that was to happen, all of a sudden, you would see a revenue jump for mobile-game publishers like Epic Games. If there's a revenue jump per user, all of a sudden those users are way more valuable to the mobile-gaming company. They're going to spend more money in advertising in order to acquire them. Because they're going to gain more revenue for each one.

This is interesting thing that I hadn't thought about before, something that ironSource noted as they're not necessarily counting on this to happen. But what if the fallout from the lawsuit between Epic Games and Apple, what if it played out that Apple reduced its take rate? That would actually be a boom for mobile advertising because every user would be more valuable.

Sanmeet Deo: Do you think that there's a likelihood that that's going to happen? Do you think Apple is going to budge?

Quast: It's hard to imagine that they would. They have the upper hand and it's a very big business for them. Basically pure profit. It's hard to say.

Jose Najarro: Yeah, I agree. I believe it's a very low chance of something like this happening. But if it does happen, it can open up a lot of stuff like Jon mentioned.

While he was talking, it brought the idea of maybe some of this extra revenue can be used to purchase small gaming studios. I think if something like that happens, we'll be seeing a lot more news like we saw about Epic Games, of big gaming studios going out and purchasing smaller studios to increase that growth that they get from driving more customers to their platform.

Quast: Yeah. I think maybe the takeaway is don't necessarily plan on this happening. But if it does happen, you are already going to know what the potential ramifications of that move would be and perhaps some of your mobile advertisers are undervalued, if that happens.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jon Quast has no position in any of the stocks mentioned. Jose Najarro owns shares of Alphabet (C shares). Sanmeet Deo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.


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