Apple’s latest big quarter – profits were up a whopping 32 percent from a year ago, to $11.5 billion, on revenues of $53.3 billion – should provide a welcome bright spot in a suddenly lurching tech sector. And a big reason for that big quarter is the giant leap the hardware giant has realized in its push to become a king of content.
The company’s subscriptions and services component jumped to $9.5 billion this quarter, also up big, 31 percent from the same period a year ago and nicely above analyst expectations of $9.2 billion.
At that size, a spun-off Apple subscriptions & services unit would generate $40 billion a year in revenues, putting it in the lower reaches of the Fortune 300. But a separate company wouldn’t be nearly as powerful as the one whose reach is amplified by its presence within a hardware giant.
Apple has pledged to double revenue from the sector by 2020, a goal executives said they expect to reach. A much larger subscriptions & services sector diversifies company revenues beyond its 900-lb. gorilla, the iPhone, at a time when global smartphone sales have plateaued (Apple made up for flat iPhone sales with soaring profits on its $999 flagship iPhone X).
More people are buying not just iPhones but also iPads, HomePods, Macs, Apple TVs, and especially its “Wearables,” the Apple Watch and AirPods. Together, users of all those devices form what the company calls its growing “active installed base,” whose members in turn buy more of the company’s own offerings, such as Apple Music, as well as 300 million subscriptions purchased within nearly 30,000 apps.
Apple also takes a share of all those subscriptions, including for streaming services such as Netflix, that are bought through its online store. CEO Tim Cook said those revenues are up 60 percent year over year.
The Apple TV 4K, which grew by “very, very strong double digits” in the quarter, is turning into a major subscription driver, Cook said. Big pay-TV providers in several countries, including U.S. cable giant Charter, are using it as a substitute for a cable box to deliver their programming through apps to tens of millions of subscribers. Cook said cord-cutting is driving this shift, which he predicted will continue to accelerate and likely happen faster than people anticipate.
Apple Music itself is also growing, up 50 percent in the past year to 50 million subscribers and free-trial users, with plenty of room globally for further growth, Cook said.
And while he said Apple “couldn’t be happier” about the success of its current services, the company is building more, though he only dropped a few scant details about what’s coming.
Cook said the people working on one such secret service are the two highly regarded former Sony TV executives – Jamie Erlicht and Zack Van Amburg – that Apple hired last year. They’ve been spearheading the company’s video production deals – worth considerably more than $1 billion – with notables such as Reese Witherspoon and Oprah Winfrey. An SVOD service built around that huge slate of shows is a near-certainty.
Apple also acquired the Texture all-you-can-read magazine app several months ago, and is reportedly weaving that into its well-regarded Apple News app to create another subscription service. Reports also have surfaced of Apple Bundles, which would combine music, news and video services for one price.
Hardware sales are directly related to big growth in less sexy corners of Apple’s subscription businesses, like its Apple Care extended warranties and its cloud services, which jumped 50 percent in the past year, as hardware users buy online backup and storage for content from their devices.
The company’s subscriptions and services even benefit when Apple is marketing its hardware.
Last quarter, Apple has spent an estimated $178 million on TV and digital ads for its iPhone, iPad, Mac and Apple Music product lines, according to data from iSpot.tv and Pathmatics. The largest share of that spending was devoted to iPhones.
ISpot, an analytics company that gathers TV ad data from 8 million smart TVs, estimated that Apple spent another $26.2 million during the year to advertise the winter debut of HomePod, its smart speaker. Pathmatics tracks digital advertising.
HomePod is something of a Trojan horse for Apple Music, the only service that can be directly controlled by voice commands within the device. Competitors such as Spotify and Pandora can be streamed on HomePods through AirPlay, but for more than the most minimal playback controls, you’ll need another device to transmit commands to the HomePod.
For investors, the biggest concern may be a trade war with China. Apple has had four straight quarters of double-digit growth in China across all its products.
Cook said tariffs can bring “a significant risk of unintended consequences,” a reason for some caution at a time when trade-war rhetoric keeps heating up. At the rate Apple has been driving growth in its services and subscriptions, “unintended consequences” may be the only thing keeping it from reaching that 2020 goal.
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