Apple's Services Category Set to Be the Company's Main Revenue Driver Over the Next Five Years

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Apple's services revenue is growing at a rapid pace and is on track to be the company's primary revenue driver in the future, according to a note Morgan Stanley analyst Katy Huberty shared with investors this morning (via Business Insider).

Huberty believes that over the course of the next five years, services revenue growth will contribute more than 50 percent of Apple's total revenue growth. The iPhone, meanwhile, will make up just 22 percent of revenue growth during the same time period, despite the fact that it's contributed 86 percent of Apple's revenue growth over the past five years.

Although "over the last five years, the vast majority (86%) of Apple's 8% annual revenue growth was driven by iPhone sales, it is through monetization of Apple's Services business that we see the company still generating mid single digit revenue growth," she said.

Huberty estimated that roughly 60% of revenue growth is now attributable to services. That, coupled with wearables, like the Apple Smart Watch, "will drive almost all of Apple's growth over the next five years," she added.
For the last several years, Apple's services category has been setting continual quarterly revenue records thanks to its rapid growth. In the first fiscal quarter of 2018, for example, services brought in $8.5 billion, up 18 percent year over year.

The services category includes iTunes, the App Store, Apple Music, iCloud, Apple Pay, and AppleCare.

According to Huberty, services revenue is at roughly $30 per device, up from $25 two years ago, but that might not be an accurate reflection of actual spending. Most Apple users do not currently pay for services, which could mean that revenue per active user is well above and "possibly double" the $30 metric.


Just 18 percent of Apple's total device installed base subscribe to paid Apple services, which means there's a lot of potential for growth in recurring revenue sources. Apple Music, iCloud, and Apple Pay are all services that Huberty believes have yet to be fully monetized.

Apple Music, as an example, has seen considerable growth since its launch and now boasts over 36 million subscribers. Just 2.9 percent of Apple customers subscribe, however. Apple Pay usage is also low, despite the fact that it's available in more than 50 percent of retail locations in the United States.

According to Huberty, Morgan Stanley is confident in Apple's growth through services monetization, with the firm setting a price target of $203 on Apple shares, which are currently trading at ~$170.

As Tim Cook often says, Apple's services category has already reached the size of a Fortune 100 company, and Apple has set a goal to double its 2016 services revenue by 2020, a target the company is well on its way to hitting.

Article Link: Apple's Services Category Set to Be the Company's Main Revenue Driver Over the Next Five Years
 

adbe

macrumors 6502a
Jul 11, 2008
621
142
If this means I'm going to be interrupted before or during even more tasks by an unwanted and annoyingly persistent interstitial dialog pushing Apple services, I'm out.

Having to work out how to dismiss the Apple Music pitch page every other day or so is already making me wonder why I'm paying Apple to 'not be the product'. It's not hard guys, I've disabled Apple Music in my settings. You want to know if I'm interested in signing up, there's your answer. It was annoying enough when iTunes would always default to the store rather than your library, but Apple increasingly seem to be losing sight of the customer in their focus only on pushing extra up-sell.

Amazon can offer me that experience for far less.
 

NightFox

macrumors 68020
May 10, 2005
2,246
1,564
Shropshire, UK
I hope they don't become so focussed on revenue per device that they lose site of the fact the the bottom line is still about number of devices, so you've got to drive growth there too. A 10% increase in revenue per device isn't good if your number of devices drops by 10% because you're not investing there.
 

dan110

macrumors 6502a
Jul 13, 2013
592
1,010
'Merica
This my friends, is why we're going to start seeing subpar hardware offerings for the foreseeable future. The "Apple" of old is dead. The new Apple will be all about the services. Which is even more scary because it seems like they're not taking that part of the business seriously.
 

Glockworkorange

Suspended
Feb 10, 2015
2,511
4,176
Chicago, Illinois



Apple's services revenue is growing at a rapid pace and is on track to be the company's primary revenue driver in the future, according to a note Morgan Stanley analyst Katy Huberty shared with investors this morning (via Business Insider).

Huberty believes that over the course of the next five years, services revenue growth will contribute more than 50 percent of Apple's total revenue growth. The iPhone, meanwhile, will make up just 22 percent of revenue growth during the same time period, despite the fact that it's contributed 86 percent of Apple's revenue growth over the past five years.

For the last several years, Apple's services category has been setting continual quarterly revenue records thanks to its rapid growth. In the first fiscal quarter of 2018, for example, services brought in $8.5 billion, up 18 percent year over year.

The services category includes iTunes, the App Store, Apple Music, iCloud, Apple Pay, and AppleCare.

According to Huberty, services revenue is at roughly $30 per device, up from $25 two years ago, but that might not be an accurate reflection of actual spending. Most Apple users do not currently pay for services, which could mean that revenue per active user is well above and "possibly double" the $30 metric.


Just 18 percent of Apple's total device installed base subscribe to paid Apple services, which means there's a lot of potential for growth in recurring revenue sources. Apple Music, iCloud, and Apple Pay are all services that Huberty believes have yet to be fully monetized.

Apple Music, as an example, has seen considerable growth since its launch and now boasts over 36 million subscribers. Just 2.9 percent of Apple customers subscribe, however. Apple Pay usage is also low, despite the fact that it's available in more than 50 percent of retail locations in the United States.

According to Huberty, Morgan Stanley is confident in Apple's growth through services monetization, with the firm setting a price target of $203 on Apple shares, which are currently trading at ~$170.

As Tim Cook often says, Apple's services category has already reached the size of a Fortune 100 company, and Apple has set a goal to double its 2016 services revenue by 2020, a target the company is well on its way to hitting.

Article Link: Apple's Services Category Set to Be the Company's Main Revenue Driver Over the Next Five Years
They've been pushing in this direction for some time. At some point, everyone will have a smart phone, tablet and laptop if they want one/all, but services are the dollar that keeps on giving.
 
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joeblow7777

macrumors 603
Sep 7, 2010
6,196
7,246
So they should start selling their hardware for less. It’s not an uncommon strategy; sell hardware at a loss to get more people into your ecosystem and buying into your services. It’s why Google gives Android and Chrome OS away for free.

Sell the next iPhone flagship at just $700 instead of $1000 and you’ll have more people signing up for Apple Music or iCloud subscriptions even if you up the price on those services. Make it easy to come through the door then milk people once they’re in!
 
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mtneer

macrumors 68030
Sep 15, 2012
2,892
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I wonder if in 10 years (or under the next CEO) Apple will go the way of IBM and completely shed off all hardware and focus purely on "services". We can just hope that Apple does not get someone like Leo Apotheker.
 
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Glockworkorange

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Feb 10, 2015
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So they should start selling their hardware for less. It’s not an uncommon strategy; sell hardware at a loss to get more people into your ecosystem and buying into your services. It’s why Google gives Android and Chrome OS away for free.

Sell the next iPhone flagship at just $700 instead of $1000 and you’ll have more people signing up for Apple Music or iCloud subscriptions even if you up the price on those services. Make it easy to come through the door then milk people once they’re in!
How many people really balk at the $1,000.00 and pay that up front? Don't most people pay the subsidy of 10 or 20 bucks a month, which is really just how they did it in the contract days? I truly don't know in that my job provides an iPhone and has done so for the past 8 years.
 

deanthedev

Suspended
Sep 29, 2017
1,287
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This my friends, is why we're going to start seeing subpar hardware offerings for the foreseeable future. The "Apple" of old is dead. The new Apple will be all about the services. Which is even more scary because it seems like they're not taking that part of the business seriously.
Hardly.

Why has Apple been investing heavily into making the most advanced mobile processors in the world? Why go through all the trouble to introduce a new file system (APFS)? Why bother with NVMe for storage when everyone else uses UFS or eMMC? Why go through the trouble of inline hardware encryption?

These could be considered overkill for phone users. Yet Apple keeps pushing forward. Clearly they have a longer term goal, otherwise why invest so much in all this power?
 

subjonas

macrumors 68030
Feb 10, 2014
2,634
2,376
Focusing on services makes financial sense for companies, but services are the least of my interests. I hope Apple stays hardware and software focused.
 
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nt5672

macrumors 68020
Jun 30, 2007
2,024
4,409
Does not look good for Apple, because they don't have a clue how to get services right. They are and, it seems, always will be hardware designers. If only they took as much care of their software as they do the hardware in the iPhone.
 
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dcnupe3

macrumors newbie
Mar 22, 2018
5
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DC
And in related news, it's been confirmed that the Pope is indeed Catholic...

But seriously, I've been saying this for over a year now. Sure the backbone of Apple is hardware, but services is the bloodstream. Without services, Apple would struggle to continually appeal to the masses. They need a mechanism to lock you in.

They have already done "Music as a Service" (Apple Music), "Storage as a Service" (iCloud) and many other ventures. The last step (which they have already begun implementing) is "Hardware as a Service". Some people still buy their iPhones outright, but Apple would much prefer you pay them a monthly fee for use of a phone, bring it to them for service and turn it back in when you're done because you don't own it. This allows a monthly revenue stream for them and guarantees you either continue it, or spend even more money to own it. Once they can figure out how to scale this to iPads and the Apple Watch, it's game over.

Consumers want convenience and these services offer the best convenience around.
 
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