Apple's Breakthrough Product: Services -- WSJ
03 August 2017 - 5:02PM
Dow Jones News
Music subscriptions, payment transactions and apps are now big
revenue contributors
By Tripp Mickle
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (August 3, 2017).
When Apple Inc. last year began breaking out revenue from app
sales, music subscriptions and payment transactions, the accounting
change seemed opportunistic. Sales of iPhones were declining and
services provided a growing business to showcase.
The change now appears more than justified.
On Tuesday, Apple said services -- the App Store, iTunes, Apple
Pay, iCloud and more -- generated more than $27.8 billion in
revenue for the 12 months ended July 1, making it the equivalent of
a Fortune 100 company and larger than Facebook Inc.'s total revenue
in 2016.
The company hit the Fortune 100 milestone a full quarter before
predicted by Chief Executive Tim Cook, as rising subscriptions to
Apple Music, Netflix Inc. and other services lifted services
revenue 22% in the June quarter to $7.27 billion. The iPhone is
still Apple's chief moneymaker, but services combined with
better-than-expected iPad and Mac sales reduced Apple's total
revenue from the iPhone to 55% in the quarter from 57% a year
ago.
"The business is really impressive when you think about it in
terms of scale compared to other publicly traded companies out
there," said Jeff Dillon, chief executive of Jackson, Mich.-based
Dillon & Associates, which counts Apple among its largest
holdings. "There's a long runway to go there."
Apple's total revenue rose 7.2% in the quarter to $45.41
billion, while profit was up 12% to $8.72 billion. The company's
stock rose 5% in late-morning trading.
Apple grew services revenue while facing a host of challenges,
including shuttered movie sales in China, shrinking iTunes market
share in the U.S., and a music-streaming service that's a distant
No. 2 player in paid subscriptions to Spotify AB.
The company remains guarded about which sources are driving
services revenue. Apple annually reports total payments to app
developers and in June said Apple Music subscriptions hit 27
million. But it hasn't broken out revenue from AppleCare, Apple
Pay, iTunes, iCloud storage or any of the other pieces that
contribute to the business.
The growth in services is driven by the size and quality of
Apple's user base. Apple now has more than 1 billion devices in use
world-wide. Its pricier iPhones, iPads and Macs are typically
bought by more affluent consumers who load them up with apps or pay
extra to store photos in the cloud. The App Store generates nearly
twice the revenue of Alphabet Inc.'s Google Play, according to App
Annie, a tracking service.
Apple to some extent is drafting off broader consumer trends. An
increasing number of customers are shifting from cable
subscriptions to streaming-subscriptions services such as Netflix,
HBO Now and Hulu, and many sign up through the App Store, giving
Apple a 15% cut of the subscription.
Apple said its number of subscriptions rose 12% in the past 90
days to 185 million. In a call with analysts, Chief Financial
Officer Luca Maestri credited some of the growth to making App
Store purchases easier by adding more payment options, such as
Alibaba Group Holding Ltd.'s Alipay in China.
The services business hasn't been without headaches. In China,
the government shut down Apple's movie and book sales because they
violated local media guidelines. Apple also has faced criticism
globally for removing apps in China such as the New York Times
earlier this year, and others that allowed users to evade the
country's censorship laws.
Apple's streaming-music service continues to lag behind Spotify,
which in June reported more than twice as many paid subscribers at
60 million. Movie rentals and sales on its iTunes service in the
U.S. have been pressured by Comcast Corp. and Amazon.com Inc.,
reducing its market share to about 20% from more than 50% in
2012.
The iPhone maker is trying to differentiate to gain Apple Music
subscribers and video viewers by branching out into original
content. It released the reality show "Planet of the Apps" in June
and will add "Carpool Karaoke" next week. It recently hired two top
Hollywood television executives to spearhead a push into original
programming.
"We'll see how this area goes, but it's still an area of great
interest, " Mr. Cook said on the call.
The services growth over the past decade is impressive
considering late CEO Steve Jobs didn't want an app store. The
iPhone launched without one, and Mr. Jobs primarily wanted to offer
only Apple services, but employees and outsiders prevailed in
getting him to change his mind, former employees said.
The bulk of services revenue now comes from apps. In January,
the company said customers spent $28.5 billion in 2016, with Apple
collecting about $8.5 billion based on its 30% share of app
sales.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
August 03, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Apple (NASDAQ:AAPL)
Historical Stock Chart
From Apr 2024 to May 2024
Apple (NASDAQ:AAPL)
Historical Stock Chart
From May 2023 to May 2024