Apple's second largest business could face hard times ahead says analyst

Apple's second largest business could face hard times ahead says analyst
Even though Apple has seen sluggish demand for the 2018 iPhone models, the company figures that it could count on its services division for continued growth. The businesses included in this category include AppleCare, Apple Pay, the App Store, iTunes, Apple Music and more. It is the second largest generator of revenue for Apple (after the iPhone, of course), and is believed to be the most profitable part of the company. Apple CEO Tim Cook has pointed out that the company's services business benefits from the large installed base of iPhones, believed to be as high as 1.5 billion units globally. This insulates the services business from weak iPhone sales.

Apple has articulated a goal of hitting $50 billion in services revenue by 2020, from 2017's $30 billion gross. During the fourth fiscal quarter of 2018, which includes the three months from July 2018 to the end of September 2018, services revenue hit a quarterly record $10 billion. While Apple seems on the way to achieving its target, one analyst calls the division "another shoe to drop." According to CNBC, Toni Sacconaghi of AB Bernstein worries that companies selling subscriptions in the App Store are beginning to rebel against paying what has become known as the "Apple Tax."

Apple charges companies like video streamer Netflix and music streamer Spotify 15% to 30% of monthly subscription revenue generated by App Store users. Apple takes 30% of what a subscribers pays for the first year, and 15% of what he pays in subsequent years. To avoid paying this, developers like Netflix and Spotify have been moving away from accepting new subscribers through their iOS apps. For example, last month Netflix said that it would no longer allow new members, or those returning after quitting the service, to subscribe via Apple's ecosystem. While continuing subscribers can continue to make in-app payments, the others will have to join (or re-join) by going to the Netflix website.

Apple Chief Financial Officer Luca Maestri points out that even though Netflix is the largest developer in the App Store, it contributed less than .3% of total services revenue last year. In other words, the company doesn't seem too worried about developers rejecting  the "Apple Tax." Even if Apple isn't concerned, Sacconaghi fears a growing "discontent," telling clients today that this could grow into a major revolt by developers. His chief concern though, is a case currently in front of the Supreme Court. If the court issues a ruling that results in the "Apple Tax" being branded a monopoly that overcharges developers, services revenue growth could be severely impacted. A ruling isn't expected soon since the court has yet to decide whether the plaintiffs have the right to sue.

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12 Comments

1. midan

Posts: 2470; Member since: Oct 09, 2017

"During the fourth fiscal quarter of 2018, which includes the three months from October 2018 to the end of December 2018, services revenue hit a quarterly record $10 billion." Wrong months! Services revenue from those months are still unknown.

5. Atechguy0

Posts: 918; Member since: Aug 03, 2018

"AppleCare, Apple Pay, the App Store, iTunes, Apple Music". Well that list of services is mainly relying on Apple's hardware. The iPhones make over 65% of Apples revenue. Apple Care 100% relys on new hardware, period. Apples pay mainly relys on iPhones and to a lesser degree Apple's watch. As far as Apple's app store and iTunes, you only need to purchase something like a new game or some other type of app that really peaks your interest. Apple's iTunes is coming to a number of new TVs in 2019. Because let's face it Apple TV sucks. Apple's HomePod sucks. Because their smart speaker can't do half of what the competition can do with their smart speakers, and they support a lot more services. Apple has always been a lock you into our platform mentality. Thats why I gave up buying books from Apple years ago. Apple is notorious for not supporting other platforms. That is why I won't buy services from Apple ever again.

2. Finalflash

Posts: 4061; Member since: Jul 23, 2013

"The businesses included in this category include AppleCare, Apple Pay, the App Store, iTunes, Apple Music and more." Literally all of those services are heavily dependent on the iPhone, so how exactly will Apple transition from hardware to software. The iPhone company has no where else to go if the iPhone starts losing customers. Let's see how this pans out I guess.

3. Peaceboy

Posts: 640; Member since: Oct 11, 2018

Apple didn’t lose costumers, its just people didn’t upgrade from new premium quality iphones. Installed base is still intact and remain willingly to buy apps at any cost. I spend many premium apps too for my premium phone. Worth every penny.

6. Atechguy0

Posts: 918; Member since: Aug 03, 2018

Analysts are saying Apple is going to sell 189 million iPhones this year. That is down from 214 million the previous year. That's 25 million, which is huge. Look Apple paid for the very first time Samsung LG, Sony, and a few other TV OEMs to put iTunes on their new 2019 TVs. Why do you think Apple did that. Apple's mentality was always about locking it's customers into their platform and ecosystem. The smart people will say I don't want to be locked into ONE platform. Look at Apple's HomePod you can only use it with an iOS device. Plus the HomePod has Bluetooth and WiFi, but it only supports AirPlay. Not to mention you can only use your voice to play songs from Apple Music. People were expecting Apple to come out with a cheaper HomePod. But since then Apple has put their Apple Music on Amazon's Alexa smart devices. That put the kibosh on a cheaper HomePod. To sum it up people look for alternatives that won't lock them into one thing, or give them limited capabilities. Apple's notorious for doing that.

8. Finalflash

Posts: 4061; Member since: Jul 23, 2013

Problem is, even Apple is behaving like the writing is on the wall for the iPhone.

9. midan

Posts: 2470; Member since: Oct 09, 2017

"Look Apple paid for the very first time Samsung LG, Sony, and a few other TV OEMs to put iTunes on their new 2019 TVs." Source? So far news only saying Samsung will get iTunes

11. Atechguy0

Posts: 918; Member since: Aug 03, 2018

Midan please don't be that stupid. Why would Apple give iTunes to Samsung's TVs now? Samsung is going to put Apples iTunes on their TVs for free, are you really kidding us? Of course Samsung and others are going to charge Apple. Especially when they have competing platforms on their current TVs. As if Apple came to Samsung and the others and said can you put our iTunes app on your TVs. We are not going to pay you anything. You can do it for free out of the goodness of your hearts. Please tell me you are not that stupid Midan. If you think Apple got this done for free. You truly are an iDiot.

4. lyndon420

Posts: 6366; Member since: Jul 11, 2012

Google made it so many of their apps are available for iPhone users which many of them admit to using. Apple eventually made Apple Music available for Android users (which seemed like a desperate move on apple's part imo), but maybe their focus will gear towards more interoperability between iOS & Android.

7. Finalflash

Posts: 4061; Member since: Jul 23, 2013

They aren't unique services though, and even on Apple platforms, users seek alternatives because they just don't compete. If the iPhone wasn't forcing defaults, most people wouldn't be using those services in their current form.

10. osterrich21

Posts: 186; Member since: Apr 14, 2017

Even in these businesses Apple is greedy

12. mootu

Posts: 1321; Member since: Mar 16, 2017

"Cook has pointed out that the company's services business benefits from the large installed base of iPhones, believed to be as high as 1.5 billion units globally. " No it's not. The 1.5 billion number is Apple devices that can ping one of Apples servers once a month, this includes Macs, iPads, iPods, Apple Tv, Homepods, Apple Watch. The iPhone installed user base is believed to be around 700 million (Apple won't give numbers as it doesn't sound as good) which also includes traded in phones which are not removed from the listings even though many are scrapped.

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