Apple Services have a Bright Future
Apple as a Walled Garden Software Subscription Company
Data on Apple’s pivot is getting crystal clear. The company’s fast-growing Services business will offset the slowing growth of the company’s flagship iPhone, which is one of history’s most successful consumer products.
The race is on, and so far, so good.
Sad to say this but Apple will never be the same as smartphone saturation sets in. Apple started disclosing costs related to its services business for the first time in January 2019 and this category now includes AppleCare, Apple Music, and Apple Pay.
Apple is focusing on bolstering its software and services offerings as the smartphone market saturates while Huawei pushes on and even Samsung declines. China is winning the smartphone battle for global domination.
Apple’s services category, which includes iTunes, the App Store, the Mac App Store, Apple Music, Apple Pay, AppleCare, and more, has become an important revenue driver for Apple. Just how important?
Apple Services increased to $11.46 billion from $10.17 billion a year earlier. That’s not stellar growth but its sure and steady. iPhones and hardware generally slump as Apple moves in to consolidate software services for its global substantial user base.
The iPhone now makes up less than half of Apple’s business
Is Apple diversifying or just finding a better monetization strategy? The argument can be made either way.
2019 is the beginning of the demise of the iPhone.
Let’s face it, this data is not good. iPhone revenue was $25.99 billion compared to $29.47 billion a year ago. That means the iPhone represented under half of Apple’s revenue for the first time since 2012.
It’s literally the end of an era for Apple.
In the quarter that ended on June 30, Apple reported a 64.1% gross margin in services, roughly in line with the 64% margin in the prior period and up from 63% in the first quarter. That’s a killer profit margin for services, where the iPhone culture bred an elite consumer base.
Those people willing to pay Apple’s “hidden tax” are still all too plentiful.
Apple surpassed 420 million paid subscribers in the third quarter. Apple wants to hit $14 billion in revenue by 2020 via its services. I don’t see why that won’t happen.
Here’s the obvious rationale. Services, which often involve recurring payments, remain a smaller revenue contributor than the iPhone, but they’re becoming more meaningful over time.
Wearables saw a big boost, likely thanks to Apple’s second-generation AirPods. Apple’s smart speaker is almost as bad as Facebook’s screen. Not really a factor compared to Google, Amazon, Xiami, and Alibaba.
But is Apple’s Service sector really that bright? Sensor Tower, a research firm, says App Store sales may indicate weakness in the company’s Services segment later this year. The firm estimates that Apple’s App Store sales in June grew 14% year-over-year, a sharp slowdown from 18% in May, 21% in April, and 22% in March, per Barron’s.
More Apple services are coming, including Apple Arcade for gaming and Apple TV+ for exclusive video content. Such additions could boost revenue, but growth becomes harder as the numbers get bigger. Apple’s ecosystem of luxury consumers won’t balloon much more, so 2019 may be as good as Apple gets.
You want to love Apple, but Apple’s decline as an innovator mirrors Silicon Valley’s decline vs. ecosystems such as China, Singapore, Israel, Bengalaru, etc…
In its Services business, Apple tries to diversify without doing anything but the AppleWatch particularly well. It’s fallen significantly behind in AI, as compared to Google and Amazon for consumers. It’s not realistic to see Apple Music or Siri suddenly becoming incredible products, as both have fallen behind in recent months and years.
Apple is solid because its profit margins enable it to do everything for everyone, but it’s not the shiny brand it once was, before you looked under the hood a little. Still, we are talking billions and in an order of magnitude that the most ambitious company can’t even dream of replicating. It would take decades for such a giant to truly fall. The 2020s may be that decade when we see it happen.
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