The pandemic is looking terrible in the US, with no end in sight for social distancing, and no vaccine around the corner. Despite this climate, Apple has some positive news to share, going by its 2020 Q1 reports.
I have only occasionally written about Apple on this blog, but I wrote last year while discussing Peak iPhone (and a follow up with more evidence) that iPhone as a product is maturing and argued that eventually, Apple will become a services company.
In the medium-to-long run, Apple will increasingly move its business from the maturing smartphone market to nascent services market. The accessories (particularly, watches and its health and fitness apps) are already showing high-margin benefits.
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Looking at the quarterly report, Apple revenues are showing healthy growth. The supply chains are all rebounding back. Apple stores in China have re-opened. Apple revenues grew an all-time quarterly high of $91.82 billion, up 9% compared to last year, same period. But the eye-popping numbers are related to its Services business. As TechCrunch reported, Apple earned a record $12.7 billion in services revenue during the first quarter of its fiscal year — a year-over-year increase of roughly 17%, growing faster than the rest.
Add to this information, the margin in Services (exceeding 65%) is higher than every other segment. Apple will increasingly focus on Services going forward.
Note that the services segment comprises the Apple TV, App Store, Apple Music, Apple Arcade, Apple News Plus, Apple Pay, and iCloud. This portfolio has none of the products (i.e., iPod, iPhones) that Apple has been renowned for in the last decade. The exact subscriber numbers were not released, but I believe they are healthy. Reports say Apple TV has an estimated 33.6million users, already above Disney plus. Soon, they will be breathing down Netflix (an estimated 61 million users) and Amazon Prime (42 million users).
No one is better at summarizing the key points about Apple business than Daring Fireball.
- Services (23%) now account for quite a bit more of Apple’s revenue than Mac and iPad combined (9% and 7%).
- The iPhone fell at exactly 50% of revenue. Services will soon be half as big a business as iPhone. Part of this is that iPhone revenue was down 7% year-over-year, and Services revenue isn’t cyclical and simply continues to grow. It was never true from a functional standpoint, but even from a financial standpoint, Apple should no longer be seen as The iPhone Company.
As I have been arguing before, based on Clockspeed arguments, Apple’s main hardware products are maturing. Tim Cook has pivoted and Apple will soon be a Service Company.
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