Apple Services Guns for the iPhone Business
Tim Bradshaw & Michael Acton
Earlier this week, ahead of Apple's earnings:
Apple is set to top $100bn in annual revenues from its services business for the first time this year, despite mounting legal and regulatory pressure on its App Store.
The services unit — which includes iCloud, Apple Pay and AppleCare insurance — is expected to deliver annual revenues of $108.6bn in the year to last month, according to analysts’ consensus estimates from Visible Alpha, up around 13 per cent from the year before.
If Apple hits those numbers when it reports its fiscal fourth-quarter results this week, that would make its services division alone larger than the entire annual sales of Walt Disney, Tesla or Tencent this year.
Well, they surpassed the expectations on Services, coming in at $28.8B for the quarter. So yes, they're well ahead of the $100B run rate. And so yes, that business – again, just Services – is now set to be bigger than Disney, Tesla, and all but around 40 companies in the Fortune 500, which is wild.
Services are forecast to make up more than 30 per cent of Apple’s revenues by the end of the decade, when the unit’s sales could be as much as $175bn, according to Visible Alpha estimates.
By comparison, the iPhone makes up around half of Apple’s expected $415bn in total annual sales in its 2025 fiscal year, with smartphone growth expected to be around 4 per cent.
The segment should be way over 30% of revenues by then – probably past 40% if current trends hold. In fact, the division is on pace to surpass the iPhone business around a decade from now, in the mid-2030s. There's a lot that can and will change by then, but that includes a lot that could change even more in Services favor, including if Apple moves further into advertising, which is already in the works. And AI will be a big wildcard there, of course. It could supercharge Apple Services, or it could hurt the company if they can't get their act together. It could, of course, also boost hardware sales if it's used more as a device upsell and not a Services upsell (it will undoubtedly be used as both).
Of course, it's likely that Services is already ahead of the iPhone in one key metric: profitability:
Digital goods and subscriptions command a high profit margin — even more than Apple’s premium-priced hardware. Gross margins for services are expected to hit 75 per cent in the most recent financial year, Visible Alpha data suggests, compared to 40 per cent for the iPhone. That has helped Apple to steadily improve its overall gross margin from 38 per cent in 2020 to around 47 per cent this year.
In fact, Services remain close to surpassing the profit of all of Apple's devices, combined, as Jason Snell has been tracking over at Six Colors for some time now. That could happen at some point next year – likely in Q3.
Yes, a change to the App Store model, which is under ever-increasing pressure around the world, could change all of these equations. But arguably more important was the saving of the Google Search payments.
And we'll see if/how those change in the Age of AI...
Regardless, it's inevitable that Apple becomes a Services company, at least from a bottom-line perspective. And one day from a top-line perspective too. They'll always tout the importance of the hardware (and broader software), but they'll also need to keep growing the business and that will continue to mainly come from the growth of Services.
M.G. Siegler
M.G. Siegler
M.G. Siegler
M.G. Siegler
M.G. Siegler