EFTA02605256

From: Richard Kahn Sent: Tuesday, August 21, 2018 6:53 PM To: jeffrey E. Subject: Fwd: Apple, Inc.: NFLX Potentially Bypassing the App Store an Overblown Concern For Now Richard Kahn HBRK Associates Inc. 575 =exington Avenue 4th Floor New York, NY 10022 tel 212-971-1306 fax 212-320-0381 cell Begin forwarded message: From: =/b>"Morgan Stanley" Subject: =/b>Apple, Inc.: NFLX =otentially Bypassing the App Store an Overblown Concern For Now Date: =/b>August 21, 2018 at 12:50:40 PM =DT To: qb><[email protected]> Reply-To: =/b><[email protected]> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> Wealth =anagement <http://www.morganstanley.com/> <http://www.morganstanley.com/img/cs/spacer.gif> Apple, Inc.: NFLX =otentially Bypassing the App Store an Overblown Concern For =ow <http://www.morganstanley.com/img/cs/spacer.gif> EFTA_R1_01795597 EFTA02605256 Katy L. Huberty, CFA— Morgan Stanley August 21, 2018 4:47 PM GMT What's New? This morning, =echCrunch reported that Netflix is currently testing (in 33 countries, =xcluding the US) having new or lapsed subscribers input their payment =ethod directly into Netflix through a mobile web version of the =ervice, thereby bypassing the App Store on iOS devices. In a worst case =cenario, this would imply that Apple would no longer take a 15-30% cut =f all NFLX related International revenue captured in the App Store. =ccording to Sensor Tower estimates, we believe Entertainment-related =pp purchases account for - 6% of App Store net revenue and 2% of Apple =ervices revenue on a T12M basis. However, it's important to =ote that China, where NFLX is not available, accounts for 40% of total =ntertainment spend on the App Store. Therefore, if we realistically =ssume that NFLX makes up half of the remaining 60% of =ntertainment-related App Store purchases and that only international =arkets, which account for about half of spend ex-China, bypass the App =tore (NFLX reportedly not testing this in the US) then the net revenue =mpact to the App Store on a T12M basis would be 80bps, and about 30bps =or all of Apple Services, with an immaterial impact to total Apple =evenue. And despite the margin profile of the App Store being =eaningfully higher than company average, we estimate the gross profit =ollar impact at a company level would be a mere 6bps. Therefore, we =elieve the revenue and profit impact on the App Store and Apple more =roadly is manageable in the event NFLX eventually decided to entirely =ypass payments via the App Store. More concerning would be if other =ervices followed suit, however we view this threat as unlikely, given =ervices/developers value the App Store for greater exposure to high =uality consumers and users value the App Store for frictionless =urchasing across services. This alert is sent from: Andrew Atlas, [email protected] You received this because =ou requested that you receive content and reports from: APPLE =NC. Please contact your FA if you want to unsubscribe from the =lerts. <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> Disclosures: Please see =he full report for risks, disclosures and other important =nformation. Important disclosures regarding the =elationship between the companies that are referenced in Morgan Stanley =esearch and Morgan Stanley Wealth Management research are available on =he Morgan Stanley Wealth Management disclosure website at https://www.morganstanley.com/online/researchdisclosures. 2 EFTA_R1_01795598 EFTA02605257 Morgan Stanley Wealth Management Not Acting as Municipal =dvisor Morgan Stanley Wealth Management is not acting as a municipal =dvisor to any municipal entity or obligated person within the meaning =f Section 158 of the Securities Exchange Act (the "Municipal Advisor =ule") and the opinions or views contained herein are not intended to =e, and do not constitute, advice within the meaning of the Municipal =dvisor Rule. Copyright The =opyright in materials provided by Morgan Stanley is owned by Morgan =tanley & Co. LLC. Morgan Stanley Wealth Management is the trade =ame of Morgan Stanley Smith Barney LLC, a registered broker-dealer in =he United States. © =018 Morgan Stanley Smith Barney LLC. Member SIPC. <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> <http://www.morganstanley.com/img/cs/spacer.gif> 3 EFTA_R1_01795599 EFTA02605258