Nearly everything is coming up roses for Apple. All of Apple’s products are big revenue and profit making machines. Tax law changes brought tens of billions in cash back home to Apple, and, ostensibly, undeserving investors.
Apple has shed the yoke of a split personality and gone all in on hardware, and they all make money hand over fist; Mac, iPhone, iPad, Watch, Apple TV, Beats Headphones, AirPods, Accessories, and Apple Stores. Yet, what’s the fastest growing profit center at Apple, Inc?
Few technology gadget makers are as good at monetizing almost everything that can be sold. Yes, Apple is a hardware company and that focus has brought it great riches and delighted shareholders and bankers all around the globe.
What grows the fastest at Apple? Services. Even Apple says it wants Services to be about $50-billion in a few years and that puts it solidly in the higher end of the Fortune 100 list. In fact, nearly every Apple product could be a standalone Fortune 500 company, with iPhone leading the way.
Services? Think of it as a catch all category with legs. App store sales, iTunes sales, Apple Music, Apple Pay, Apple Care, iCloud and just about anything and everything else that isn’t a piece of hardware that can break. Apple has admitted to an installed base of users that exceeds 1.3-billion, so selling into that base– apps, music, et al– brings in more revenue.
Why is the Services group so important to Apple’s future?
Growing the base of users is a growing challenge. iPhone sales units remain basically flat the past few years. The Mac, though it sells at near record levels each quarter, has hit a plateau. The iPad has dropped from previous record sales. Apple TV, Watch, HomePod, Beats and AirPods may be growing some hardware revenue, but they also spur Services revenue and do not account for much revenue growth.
Services as a category of revenue and profits is typical Apple. High margins. Analysts say Services average about 60-percent gross margins so selling anything back to the customer base is a highly profitable opportunity and Apple has capitalized on it more than any major hardware maker.
So, what’s the problem?
As rapidly as Services is growing and as much as Services has legs, everything Apple does is hardware sale dependent. If and when hardware sales stall– and we may be near a peak Apple already– Services will need every more products to help shore up the lack of hardware growth.
Apple is a hardware company. Without hardware, Services is icing without the cake.