In a recent article titled "Apple Has a New Strategy Up Its Sleeves," I spoke of how user growth and not device sales will decide the future of Apple (AAPL, Financial). I also showed how it was implementing the strategy by pushing its services agenda to the forefront.
Apple has successfully monetized several other elements of its lineup, such as Apple Pay, Apple Music, iTunes and even iCloud. This is just the beginning for Apple, and we’ve not seen the best of it yet.
Here’s why that’s the case.
The numbers behind the services segment
Apple’s revenue from services in 2013 was $16.05 billion, after which it grew 13% in 2014 and 10% in 2015 to finally reach $19.909 billion. But revenue growth accelerated 26%, 20% and 19% during the first, second and third quarters. Sales from services and other products were the only segments that posted growth in the first nine months of this fiscal, and they grew in the above-20% range.
In the first nine months of the current fiscal, Apple made $18.023 billion from services, accounting for 10.67% of the company’s overall revenue. Although that accounts for only one-tenth of its sales power, Apple's revenue stream is steadily growing. The significant point here is this: when product sales reach a plateau, as they inevitably will, it will be services that bring the steady inflow of money. With Apple Pay in that revenue mix, it might even keep growing for many decades.
CEO Tim Cook has stated that a goal is to make Apple's services unit the size of a Fortune 100 company by 2017. It's well on its way to that target already, and we could be looking at around $24 billion in services revenue for the full fiscal 2016.
The reach
As of the last count Apple Pay already had 12 million registered users around the world. Apple Music adds another 15 million to that count. Now, that might be dwarfed by the billions of people on Facebook’s (FB, Financial) many networks, but you have to remember that this is just the beginning for Apple.
It's only just started thinking in terms of user base and reach, but now that it's firmly on that path, we should see some interesting growth numbers coming out of its stables soon. Apple Maps, for example, hasn’t really taken off yet, but it is still part of that ecosystem that keeps users engaged with the company in some form or another.
What we really need to look at is its potential reach. It recently announced that it's sold its 1 billionth iPhone, with about 231 million coming from 2015 sales alone. When you look at it from that perspective, then Facebook’s user base isn’t that hard a target to match.
Moreover, with the iPhone SE doing so well this past quarter, the subpremium approach may well double the number of iPhone users around the world – especially in emerging pockets like India and China.
I might be making a bold statement if I said that Apple is slowly becoming a services company rather than a device maker, but that’s where all the signs are pointing. Its premium and subpremium devices will all become mere gateways to the real Apple’s capabilities in areas such as artificial intelligence, cloud storage, mobile payments, health apps, streaming music, mapping, content distribution (Apple News), cross-device gaming, virtual reality and more.
For investors who believe that Apple’s dipping sales is an indication that the company is on its way down, be aware that this is merely a bump in a long road that stretches out beyond the next decade. And let’s not forget that it has the money power to disrupt the disruptors and the brand power to influence billions of users across the world. That’s where the future lies for all tech companies.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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