Apple’s next growth phase may be propelled by services

The iPhone may be Apple’s biggest talking point, but another less spoken about business segment is slowly becoming a cash cow for the company. Shashank Venkat investigates Apple’s growing services business.

When we think of Apple, we normally associate it with its bevy of hardware devices. This year’s keynote event was yet another spectacle for Apple fans, with the launch of three new iPhones, along with some other new gadgets. However, the tech giant is quietly feeding its top line with another side of its business – services.
 
Apple’s list of services already includes Apple Music, App Store, iCloud and various other offerings. The company also has plans to launch a new video streaming service, and it aims to combine video, tv and news to offer a new subscription bundle. Apple’s focus on its services segment is understandable as it seeks to counter slowing iPhone sales as more competitors catch up with its device specs.
 
A new CNBC report predicts that Apple could generate $500 million in revenue through App Store ads alone, and it could balloon to become a $2 billion business by 2020. In fact, the services business has already become Apple’s second biggest source of revenue and is one of its fastest growing business segments. According to analysts, the services business grew more than 21% last quarter, raking in estimated revenue between $9.5-$12.8 billion.
 
While the forecast growth numbers are lower than last year’s 34% increase, the services business is still growing at a pretty fast clip for Apple. And with more subscription-based offerings in the pipeline it is likely that Apple is going to see unprecedented growth in this segment over the next few years.
 
Recently, Apple became the first company to cross $1 trillion in valuation, and it is no secret that its services revenue (which includes subscriptions) played a critical role in helping the company reach that landmark. With Apple’s fourth quarter earnings report just around the corner, it will be interesting to see the contribution of its services business in its growth. If we were to make an educated guess, we think that the numbers will assume even greater significance this year onwards.
 
Subscription models are rapidly becoming an integral strategy for leading technology businesses as they look to diversify their offerings. Amazon already owns the world’s most successful (and lucrative?) subscription program in Amazon Prime. Google is also making moves in the space with the company recently introducing enhanced subscription management features in its Play Store, and it is rumoured to be in the process of launching a subscription service called Play Pass which will allow users to access a set number of apps for a simple recurring fee. Facebook has also hinted that it could offer ad-free subscriptions to its users.
 
Companies like Apple recognise that subscription models are among the most efficient ways to attract, engage and retain customers. The lifecycle of a hardware device typically lasts much longer than a service lifecycle which could be as frequent as monthly. Moreover, subscriptions also accord Apple the flexibility to build different types of services into its ecosystem. Subscription models also give users the ability to try out different types of services at low cost and then choose the service that fits them best. It’s a win-win for both Apple and its users.

While Apple’s services business may not be its most glamorous offering, it is surely one of its most productive business segments. And our guess is that this might just be the tip of the iceberg!