★ The EU’s Share of Apple’s Global Revenue

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The DMA allows the EC to penalize “gatekeepers” with fines that are vastly disproportionate to the amount of revenue they generate in EU member states.

A few readers have asked about my speculation that Apple, along with the other DMA-designated gatekeepers (none of which are European companies of course), might reasonably pull out of the relatively small EU market rather than risk facing disproportionately large fines from the European Commission. The DMA allows the EC to fine gatekeepers up to 10 percent of global revenue (which would hit a hardware-based company like Apple particularly hard) for a first offense, and up to 20 percent for subsequent fines. But the EU represents only 7 percent of Apple’s revenue. That figure comes from CFO Luca Maestri on Apple’s Q1 2024 analyst call:

Amit Daryanani, Evercore: Fair enough, and then as a follow up,
you folks have implemented a fair bit of changes around the apps
for in Europe post the DMA implementation there. Can you just
touch on what are some of the key updates and then Luca, does
NetApp at all, do you see it having any significant impact
financially to your services or the broader Apple P&L statement.

[Remarks from Tim Cook omitted.]

Luca Maestri: Yes, and Amit, as Tim said, these are changes that
we’re going to be implementing in March. A lot will depend on the
choices that will be made. Just to keep it in context, the changes
apply to the EU market, which represents roughly 7% of our global
absolute revenue.

It’s unclear whether Maestri was saying that the EU accounts for 7 percent of Apple’s worldwide App Store revenue, or 7 percent of all revenue, but I suspect it doesn’t matter, and that both are around 7 percent. App Store revenue ought to be a good proxy for overall revenue — there’s no reason to think EU Apple users spend any less or any more in the App Store than users around the world.

There’s some “7 percent sounds way too low” confusion that stems from the fact that Apple, in its quarterly consolidated financial statements, breaks results into five geographic regions: Americas, Europe, Greater China, Japan, and “Rest of Asia Pacific”. “Europe” accounts for somewhere around 25 percent of Apple’s global revenue. That’s the number most people think about. But there are a significant number of high-GDP countries in Europe that aren’t in the EU — the UK (most famously), Russia, Turkey, Switzerland, Norway, and Ukraine. More importantly, Apple’s “Europe” includes the entire Middle East.

So EU member states account for only 25–30 percent of Apple’s revenue from “Europe”, and just 7 percent globally. 7 percent is significant, to be sure, and in addition to users, there are of course many iOS and Mac developers in EU countries. I really don’t know what Apple pulling out of the EU would even look like, but it would be ugly. Could they merely stop selling the iPhone there but continue selling other products? Would that create a massive gray market for iPhones imported from outside the EU? How would Apple deal with the hundreds of millions of existing iPhone owners in the EU? I have no idea. It would be a mess, to be sure, but the DMA has already made doing business in the EU a mess for Apple and the other designated gatekeepers. But one can make the case — as Eric Seufert has — that American companies have to at least consider the fact that doing business in the EU isn’t worth the risk of fines so vastly disproportionate to the revenue they generate in the EU.

And it’s not like the risk is merely a first-offense fine of up to 10 percent of annual global revenue and a single second fine of up to 20 percent — there’s no limit to how many times the EC can fine a gatekeeper for non-compliance with the DMA’s arbitrary and vague rules.

The EC just fined Apple $2 billion for violating article 102(a) of their rules on competition, for hindering Spotify (a European company — surely a coincidence) in the music streaming market. The entirety of article 102(a):

Any abuse by one or more undertakings of a dominant position
within the internal market or in a substantial part of it shall be
prohibited as incompatible with the internal market in so far as
it may affect trade between Member States.

Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling
prices or other unfair trading conditions;

Where “unfair” is never defined. That’s as specific as the law gets. Note too that the base penalty for this infraction, per the EC’s 2006 guidelines, was €40 million, but the EC raised the fine by a factor of 45× to €1.8 billion because the guidelines aren’t binding:

In addition, the Commission decided to add to the basic amount of
the fine an additional lump sum of €1.8 billion to ensure that the
overall fine imposed on Apple is sufficiently deterrent. Such lump
sum fine was necessary in this case because a significant part of
the harm caused by the infringement consists of non-monetary harm,
which cannot be properly accounted for under the revenue-based
methodology as set out in the Commission’s 2006 Guidelines on
Fines. In addition, the fine must be sufficient to deter Apple
from repeating the present or a similar infringement; and to deter
other companies of a similar size and with similar resources from
committing the same or a similar infringement.

Judging from the EC’s actions and statements, there’s no reason not to believe that the EC will pursue maximum fines under the DMA.1

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