Beyond the iPhone: How Apple ($AAPL) is Diversifying Revenue Streams
We all know Apple, most likely due to the iPhone, the most selling smartphone brand for decades. Our world population is about 8 billion people, and the number of global iPhone users is 1 billion. That’s 1/8 of the whole population! This success in selling phones contributed to about half of the company’s massive $394 B revenue. However, the iPhone’s revenue proportion is decreasing and will decrease even more.
Why Apple Needs to Diversify
Saturated smartphone market
It’s harder now for Apple to grow earnings from smartphones. Apple has already sold a significant amount of smartphones, making the market more and more saturated. Also, by logic, to increase earnings for a company earning $100 by 50%, we only need to increase by $50; increasing 50% for a company with earnings as large as $1 billion would require $500 million, a much more significant amount. In the case of Apple, with 1 billion users, it must be tough to grow even further.
Competitors arise!
It used to be just Apple vs. Samsung. Now we have the smartphone giant Huawei and other brands, including Xiaomi, Oppo, ASUS, VIVO, and many more. The smartphone market has become increasingly crowded, inevitably eroding Apple’s share of the pie. Competitors are developing more innovations and selling cheaper, which are highly considered, especially in emerging nations.
Force Majeure
The smartphone industry has been undergoing macroeconomic challenges, such as the recent chip shortage. The smartphone industry has a long and global supply chain, which means raw materials can be sourced from one country, manufactured in another, and sold in another. Minor supply chain disruptions can lead to shortages, price increases, etc. Diversifying from phones can help Apple become more independent from things they cannot control.
Where to diversify: Services
Take a look at this data.
As the proportion of sales from iPhones has been decreasing since 2015, the services segment is the one that is growing the most among other segments (Apple Music, iCloud, Apple TV+, etc.). The question is, “Why Services?” Here are five reasons.
A lot of opportunity for growth
The services industry is a large one. And with a massive growth potential. Consumers are experiencing a behavioral shift. They are putting more priority on convenience rather than physical goods. Subscription-based models are also getting increasingly popular. Demographic change also plays a role, as younger generations are bigger fans of these products. Also, remember that scaling up on services is much easier than durable goods.
High margins
iPhones require lots of materials to make. They need to manufacture chips, screens, frames, buttons, etc. These things require money to create. What about services? After the development process, it takes 0 cash for each new subscription. Services are very profitable. What’s hard is to enter the market. But for a giant like Apple with huge sums of cash? I think not.
Recurring, Stable, Predictable
The services segment differs from smartphones which macroeconomic factors, supply chain disruptions, etc., can easily disrupt. They are more resilient to these changes. To create a new product launch, Apple also takes on the risk of these products not selling. On services, the risk is much lower. They are also recurring income, unlike more seasonal phone sales.
Distribution channels which are too great
When selling physical products, we distribute them through physical stores. On services, we distribute them through the Appstore, through their devices. Now, remember earlier I mentioned that there are 1 billion people using iPhones? Also, consider the MacBook, iPad, Apple Watch, and other products.
Improve customer loyalty and ecosystem.
We all know that Apple is known for its excellent customer loyalty. Those who bought an Apple product would not likely switch to another brand. This is because of their ecosystem. An Apple user must undergo many adaptations and incompatibilities with other brands. The services segment strengthens this economic moat because users who go into the Apple ecosystem are invested in it and would be less likely to switch to other brands.
Key Message: Apple has to diversify from phones due to saturated markets and rising competitors. They are looking to go deeper into the services segment due to high growth potential, high margins, stable incomes, great distribution channels, and potentially improving customer loyalty.
