“These are not three separate devices. This is one device, and we are calling it ... iPhone. Today, Apple is going to reinvent the phone.”
Ah! What an iconic product launch! And by far the best presentation we’ve ever seen — after all, Steve Jobs is THE master of presentations. But it wasn’t just the presentation. The product itself was so groundbreaking that it looked like a match made in heaven!
Apple is the iPhone. Apple is the Mac. Apple is the iPod. The hardware giant has given us so many remarkable inventions, and is wildly popular all thanks to these innovative products.
But truth be told, that’s not the entire reason why it’s the world’s most valued company, getting closer to the value of a whopping $3 trillion. While these iconic hardware products have made Apple the cult it is today, Apple’s present & future is in the hands of a dark horse — a business that’s lesser-known, yet the most profitable for Apple.
So today’s article is about Apple’s future. Its software & services future — Apple Services!
Firstly, what are Apple Services? Doesn’t Apple just make iPhones, iPads, Macbooks, etc.?
Absolutely, Apple has been a hardware company right from the start. Just think about it — the first thing that comes to your mind when you think of Apple is possibly one of its flagship products — iPhone, iPad, or Macbook, and how elegant its design is or how crazy its performance is.
And rightly so. Apple’s hardware is exemplary. It’s the major reason why Apple is the world's most valued company.
But Apple's hardware has always been supported by robust software that ships along with these devices. For instance, macOS & iOS are well known for ease-of-use, or even the Notes app, which ships for free and is one of the most powerful note-taking apps.
So put simply, Apple Services is just Apple’s way of making money on top of all the software that ships along with Apple devices. Well, technically not just Apple devices now. Most of these software are available on other platforms too.
Here are Apple’s most popular software as services
1. Apple Music
Apple’s own music streaming service. It also has playlists by influencers, shows by musicians, and many other social features.
Think of it as Spotify, but made by Apple. It has ~72 million subscribers (Mar 2020).
How Apple makes money: Subscription fees, Partnerships.
2. App Store
That place where you download apps for your iPhone, Mac or iPad. It has 170 billion+ downloads in a decade!
In fact, it is one of the largest contributors to Apple’s services revenue.
But wait, how is apple earning any money when I am downloading/buying stuff made by other companies?
Simple — Apple takes a cut in every transaction that happens on the app store. You buy a subscription, Apple makes money. You download a game, Apple makes money. You buy a pack of coins inside a gaming app, Apple makes money. You get the drift.
How Apple makes money: Commissions on subscriptions, paid downloads, in-app purchases.
This is Apple’s own cloud storage service. Think of it as Google drive, but made by Apple.
Now, everyone who owns an iPhone/iPad/Mac needs to have an iCloud account or an Apple ID and gets 5GB of free storage.
Sweet! Well, not so much. You’ll very quickly run out of your free iCloud storage (thanks to high-res photos, HD videos & bulky apps) and then Apple will keep annoying to buy more storage. Smart!
How Apple makes money: Subscription fees for add ons.
This is Apple’s own streaming service. Think of it as Netflix, but made by Apple.
It has ~20 million subscribers now.
How Apple makes money: Subscription fees.
5. Apple Pay
This is Apple’s own instant payment service. Think of it as Paypal, but made by Apple.
Again, like the App Store, Apple takes a cut on every transaction that happens on Apple Pay.
How Apple makes money: Commissions.
And the list goes on. There’s Apple books, podcasts, Apple Care+, and much more.
So, how are these services working out for Apple?
Now that we know what Apple services are, let’s get into the numbers.
Apple Services vs. iPhone
Apple makes ~$68bn in revenue from services in a year. That makes it Apple’s 2nd largest revenue maker, next to only iPhone.
But here’s the best part — Apple makes ~64% profits on services vs. 32% on hardware devices! Sweet!
So while iPhone makes ~$192bn in revenue, it brings in ~$62 bn in profits for Apple. Whereas services makes ~$68bn in revenue and brings in ~$44bn in profits! When you look at those profit numbers, the difference between the two looks much smaller.
Apple Services vs. World’s top SaaS companies
Now here’s something that’ll surprise you. If you look at the world’s top SaaS companies — SAP, Salesforce, Adobe, etc., Apple Services beats them hands down in terms of revenue!
In fact, if I combine the revenue of Salesforce, Adobe & Zoom, I’ll arrive at the number of ~$39bn. Apple Services alone makes >1.5x of that revenue 🤯
So yes! SaaS is working out really well for Apple.
Just a bit of history here — When Tim Cook took the reins of Apple from Steve Jobs, he was convinced that Services is going to be THE next big thing for Apple. This was 2011. Apple made only ~$5bn in revenue from Apple services then. From there, it has grown 13-14x to where it is now!
Great! But why does Apple want to move from hardware tech to SaaS?
Well, you already know the first reason.
Apple can make a LOT more money from services or software than selling hardware products, 2x to be accurate.
So it makes sense to focus your business on areas which make you the most money, doesn’t it?
Not really. You see, Apple’s iconic products are the reason why it’s such a cult today. You know Apple because of the iPhone, Mac, iPod, etc., and not Apple Music or Apple TV. Plus, it’s not the case that these products have thin margins. 30% is a healthy profit number for any business.
So why then is Apple shifting focus from hardware tech to SaaS? 🤔
There are 2 reasons for this:
- Hardware sales are stagnating. Both iPhone & iPad had peak sales numbers in 2015, and have consistently dropped by 10-15% every year after that till 2019.
- There’s strong competition in the phones & tablets market. In fact, the growing popularity of Chinese companies like Xiaomi and Huawei has been the primary reason for the drop in demand for iPhone & iPad.
Hmm, it’s all starting to make sense now! The iPhone, iPad, Mac have all been heroes for Apple till now, but it’s the software that’s going to build the future for Apple.
Wait, so will Apple no longer make iPhone, iPads, Macs? 😧
Haha, not at all!
As I said, all of these products have healthy margins, so it makes no sense for Apple to discontinue any of these products.
OK, so Apple will no longer be launching amazing, new hardware and spend as much on research?
That’s another NO.
There are 2 reasons for this:
- Apple’s hardware products are the face of the company. Without those products, the software by itself is nothing.
- Apple is possibly planning to start renting out their hardware rather than plain old selling, more like “hardware as a service”.
The biggest testimony to this is the M1 processor Apple launched in 2020. They put in a LOT of money, time & effort to build their own computer chips, which are now the most powerful chips we’ve ever seen.
Here’s another fact and a bit of contradiction to the narrative so far — While the iPhone & iPad sales dropped consistently between 2015 to 2019, they peaked again in 2020. So much so that they also beat the numbers from 2015!
Well, it looks like amazing news for Apple from all around OR 2020 could just be an exception. After all, the pandemic was a black swan event and possibly caused this anomaly. Either ways, not reason enough for Apple to move away from its plans.
All in all, Apple’s move to SaaS is its need of the hour. And it seems to have paid off well already over the last decade. What remains for us to see is whether it can shape Apple’s business over the next decade.