How Apps, Music and More Can Buoy Apple Beyond the iPhone

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From The Wall Street Journal:

Contrary to popular belief, Apple isn’t a hardware company. Nor is it a software company. Apple is, fundamentally, an ecosystem company—one that, with the help of millions of developers world-wide, has created a vast web of software and services that run on its 1.3 billion active devices.

Apple revenue has been dominated by the iPhone, but thanks to the services side of its business, the company is proving to be more durable than any single iPhone generation.

The trouble is, as Apple increasingly emphasizes device prices over volumes for revenue gains, it confronts a fundamental tension—between charging people more for hardware and, simultaneously, more for services to access through it.

The former puts profit margins ahead of prevalence, while the latter emphasizes maximizing the number of gadgets in customers’ hands.

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Just as Chief Executive Tim Cook predicted in 2016, Apple has increased revenue from its intangible services into a Fortune 100-size business. In the 2017 calendar year, Apple reported $31.15 billion in revenue from services including Apple’s music (both downloads and subscriptions), video sales and rentals, books, apps (including in-app purchases, subscriptions and advertising sold by Apple), iCloud storage and money Google pays Apple to be the iPhone’s default search engine.

Another way to think of it: Apple is on track to take in about $26 a year in revenue from each of its 1.3 billion active devices.

. . . .

Mr. Cook says by 2020 he wants Apple’s services revenue to double from its 2016 level. Between now and then, if revenue from iPhone sales holds steady or declines, which would be a natural consequence of people holding on to their devices longer, then growth in services could become the primary driver of Apple’s overall revenue growth—or even the one thing that keeps it from declining. Services, and the millions of developers and thousands of companies behind them, are the reason the iPhone is so sticky, says Horace Dediu, an Apple analyst.

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When iTunes was king, the bulk of Apple’s services revenue was music and movie downloads; with the arrival of the iPhone, it soon became apps. As Apple rolls out more gadgets, its services revenue will continue to diversify.

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Apple already offers an upgrade program, where users can pay off an iPhone after 24 months or trade it for a new one after a year. Imagine a service where you simply subscribe to a regularly updated iPhone, Apple Watch, AirPods or some subset of these devices. Mr. Dediu estimates that for every Mac or iPhone, the average Apple customer spends on average a dollar a day on hardware plus services.

Link to the rest at The Wall Street Journal