Launched in 2007 by Steve Jobs, the iPhone has been a real revolution for both consumers and Apple. Indeed, its phenomenal success over the past 10 years has enabled the Cupertino giant to generate record profits and inflate its war treasure to $250 billion. Just that!
Nevertheless, this success will not have been as good as it seems for Apple in the sense that the company has rested somewhat on its laurels. By simply making its cash cow grow as much as possible, Apple has abandoned its diversification strategy. It was finally at the end of 2018 that electroshock occurred for Tim Cook’s company.
The slightly lower results announced by Tim Cook were attributed to the drop in iPhone sales. All this really highlighted Apple’s relative fragility with its over-reliance on iPhone sales. Apple then decided to take real control by announcing a whole series of measures to strengthen the development of its service activities in order to limit the dependence of its revenues on its iPhone sales.
iPhone Is Now Less Than 50% Of Apple’s Revenues
Apple’s quarterly revenue have just been announced, up 1% compared to 2018. As a result, Apple achieved revenue of $53.8 billion, ending two consecutive quarters of decline. Of this turnover, iPhone sales represent nearly 26 billion dollars.
This remains huge but the 11.8% drop in iPhone sales compared to last year allows Apple to see the dependence of its revenue on the iPhone drop below the symbolic 50% figure for the first time since 2013. This is exactly what the financial markets have been asking Apple for many months now.
While iPhone sales are falling, the rest of hardware sales (iPad, MacBook and accessories) are up by nearly 20% to reach $16.3 billion. All this allows Apple to maintain a quarterly profit of more than $10 billion. This profit is down 13% compared to last year but higher than expected, which shows that the shift towards service activities is being successfully implemented.
Diversification In Service Activities Is Underway
Proof of the success of this shift initiated by Apple at the beginning of 2019, service activities (Apple Pay, App Store, Apple Music, iCloud,…) generated $11.5 billion over the last quarter with an increase of 12.6%. Apple’s efforts in this sector are therefore beginning to bear fruit.
Apple does not intend to stop there because at the end of the year, its streaming video service will finally be launched. The Apple TV+ project is ambitious with the production of many original content similar to what Netflix or Amazon are doing. On the program, many series but also some TV shows. This is supposed to boost Apple’s revenues in services, but it will be hard to compete sustainably with Netflix and the new heavyweights that will enter the market very soon: HBO Max and Disney+.
Headphones And Watches, A New Gateway To The Apple World
While Apple smartphones are selling less, the accessories that go with them are doing quite well. Indeed, the division to which these accessories are attached is booming. Combined sales of AirPods, Apple Watch, HomePod and Beats headphones increased by 48% to $5.5 billion.
More specifically, the second generation of AirPods has been a huge success. It has strengthened the product in its reference position on its market. Admittedly, this market is still not very competitive, but still. Finally, the fourth generation of Apple Watch has done the same in the world of connected watches. It must be said that the latest Apple Watch has fixed many defects that had so far slowed its development.
It is therefore clear that the iPhone is no longer the main gateway to the Apple ecosystem. Other products, such as AirPods, are taking over. One of the advantages of these AirPods is that they also run on Android, which broadens the target audience of potential users. Even better, since they are optimized for iPhones, they could ultimately push consumers to turn to the Apple ecosystem and especially its iPhone for which they are optimized.
A Return To A Market Cap Of More Than $1 Trillion In The Sights
This good news will allow Apple to convince financial markets of the successful implementation of its new diversification strategy. With in the sights on a return to a market capitalization in excess of $1 trillion! All this confirms that Apple’s objective of doubling the size of its service business revenue in 2020 compared to what it represented in 2016 is now fully achievable.
In addition, Apple also aims to reach the 500,000 paying subscribers in the Apple ecosystem. An ever more qualitative strategy with the objective of selling more services to users whose number will inevitably decrease. To achieve this objective, Apple is counting not only on the launch of Apple TV+ but also on new services that will be launched by the end of the year. I am referring here to Apple Card but also to the upcoming launch of a dedicated video game service.
Despite this many good news, the picture has its little darker side too with an increasingly strong resistance to Apple’s practices with its App Store. This famous application store, which is the single entry point to reach 900 million iPhone users, accounts for nearly a third of the group’s service division’s sales. So it’s a considerable financial windfall for Apple. The problem comes from the fact that more and more developers are now rising up against the margins taken on transactions made on this App Store. This margin is now known as the “Apple tax”.
Major groups have even taken up the challenge, including Spotify, Apple Music’s main competitor, which has opened a complaint file with the European competition authorities. Indeed, the Swedish company behind Spotify complains in particular about difficulties in advertising on the App Store, which of course Apple denies. We will have to see what this complaint will do, but it poses a real risk to the revenue generated by Apple with its App Store. Indeed, the giant of Cupertino could be forced to revise its business model by giving more money back to developers and leaving more space to competitors of its own services in the App Store.
A Trend That Should Continue Until End-2020
The release of the iPhone X at the end of the summer of 2018 had enabled Apple to reach record sales numbers. Nevertheless, competition from Chinese smartphone manufacturers such as Huawei, Oppo and Xiaomi are weighing on the American giant’s sales. The next generation of iPhone that will be released in a few weeks should only be a minor iteration that wille simply offer improvements in performance and power.
The situation should therefore not change by the end of 2020 when Apple will release its first 5G compatible iPhones. This new technology could change the game by offering a higher download speed that could pave the way for new uses. Leading smartphone manufacturers are expecting a lot from 5G to convince customers to invest more than $1,000 again to renew their smartphones.
In the meantime, it will be necessary to closely monitor the evolution of Apple’s service business and the share of iPhones sales in its revenue. The challenge for Apple is to preferably increase each of these activities so that the share of sales of iPhones remains below 50% of its turnover.
This is the challenge of the coming months and years for Apple, which has definitely entered a new era: the post-iPhone era.