Apple Services Revenue Mix

Apple’s services business is becoming a big part of the thesis behind buying the stock as the smartphone market is saturated and there’s probably a limit to how much Apple can raise the prices of its iPhones. There was some pushback from the consumer after the $999 iPhone X came out. It doesn’t seem like the firm will be able to raise prices that much each year. Raising prices goes against every other consumer-tech hardware product’s price trajectory. Apple doesn’t break down its services business which makes the chart below, which utilizes a few data points Apple releases to get a mix of the revenue from each business line in the services category, very valuable. I find it shocking that the Apple Pay division has less than $1 billion in revenues which represents 0% of total services revenue.

Apple Pay & iCloud

Some claim Apple Pay drives services growth, which isn’t true. On the one hand, this means there’s room for growth, but on the other hand there needs to be a game changer to make it relevant. In the latest iPhone software updates, the settings app gives users an alert to set up their Apple Pay and iCloud accounts. To me this wreaks of desperation as the firm tries to nickel and dime consumers opposed to the past where growth stemmed from consumers desperate to buy the latest products such as iPhone, MacBook, and iPad. On the bright side, it’s not as if Apple Pay and iCloud are bad services. Apple Pay is a convenient way to make purchases and iCloud allows a more permanent place to save your videos, photos, documents, etc. Both services are for Apple device users which limits their addressable market, but acts as a benefit of buying Apple devices.

Apple Versus Amazon

Apple is in a difficult situation as it keeps needing to beat out amazing years of earnings results. Apple made more money last quarter than Amazon made in its entire existence. To be fair, Amazon has a different business strategy to Apple in that it invests its earnings into new products at a high rate, showing little profits. This allows the company to pay less taxes and grow quickly. It has worked for the company.

Apple cares more about achieving profits than market share. That’s a great strategy which has worked well as it has a relatively small market share in the smartphone category but makes almost all the profits. On the positive side, Apple doesn’t rely on ads which exploit users’ privacy. This strategy is coming under intense scrutiny as regulators clamp down on Alphabet and Facebook. The negative is Apple appears to be behind Amazon and Alphabet in AI which makes Siri weak and versus Alexa and Google. This causes Apple to struggle in the smart speaker category.

Gross Margins

The biggest division in the services category is digital content which also happens to have the lowest gross margins as you can see from the chart below. Licensing is an obvious winner for gross margins because Apple simply gets a cut of the pie for distribution. There are little costs in most licensing businesses. The App Store is 35% of the services business and iTunes and Apple Music represent almost as much as the App Store. It makes strategic sense for Apple to keep boosting the storage in their devices. Storage is cheap and the potential cost of lost iCloud users is minuscule compared to the potential revenue from downloading apps and digital content. There is room for expansion in spending on apps as many people, who still have 16 GB devices from a few years ago, will soon be upgrading to devices with more storage.