Apple's Not a Services Company Yet
Apple Inc. wants to convince investors it is more than a maker of expensive slabs of glass and circuits. But its own numbers belie its attempt to rebrand itself as more than a hardware company.
The company on Thursday released its annual display of vague numbers about its App Store. The disclosure is enough to estimate that people bought roughly $29 billion worth of apps, virtual lucky eggs for Pokemon Go and other digital goods from the App Store in 2016. That’s roughly a 40 percent increase from the previous year, which is on par with the rate of growth for the App Store in 2015 and slower than the 50 percent jump Apple disclosed for 2014.
Figuring Apple takes a 30 percent cut of App Store purchases, 1 the company’s haul from App Store purchases works out to about $8.6 billion for 2016. That figure equals about one-third of Apple’s total revenue in the fiscal year ended in September from its internet “services” business, which includes App Store revenue plus music and movie downloads on iTunes, subscriptions to Apple Music, AppleCare device warranties and Apple Pay. Credit Suisse has estimated the App Store is the largest component of Apple’s revenue from internet services, with AppleCare a distant second.
To be sure, the total sales and growth for the App Store are impressive for a business of that size. Apple CEO Tim Cook likes to say that the services business will soon be the size of a Fortune 100 company on its own.
But put another way, it's not so impressive. The App Store revenue growth rate didn't budge even in a year that featured the debut of one of the biggest app hits in history with Pokemon Go, new apps for the Apple Watch and Apple TV and what Apple said was a 90 percent jump in App Store revenue in China. And from fiscal 2013 to the most recent one, Apple's revenue from the App Store and its other internet services rose 52 percent -- nearly the same rate as its much larger iPhone business.
I’ve written before that if Apple wants to get credit from investors for its internet services, it needs to do more to prove its sales of apps and music subscriptions aren’t sporadic purchases that will fall off as Apple has trouble selling more and more iPhones each year.
To be fair, an analyst pressed Apple's chief financial officer on that question in October, and he had a good parry: Apple's revenue from internet services grew 22 percent in fiscal 2016 even as Apple sold fewer iPhones than it did the previous year. If Apple repeats that performance in coming years, I will change my mind about the durability of Apple's non-hardware revenue.
It's not a coincidence that Apple started to trumpet its internet services revenue in 2016 -- a year in which iPhone, iPad and Mac sales each fell. Those three hardware product lines remain the heart of Apple, and they collectively generate 84 percent of the company's annual revenue. Apple can talk about App Store sales as much as it wants, but apps and music are Apple's cart and its hardware business is the horse for the foreseeable future.
While it has been typical for Apple to take 30 cents of every dollar on purchases people make through the App Store, that commission has become less vanilla over time. Apple, for example, said last summer that it would take a smaller cut from some developers who sell subscription products through the App Store.
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