With Apple’s recent reveal that its “Services” business now has 270 million subscribers, the non-iPhone, non-hardware side of the company’s business just got very real.
In its second quarter earnings report earlier this week, Apple said Apple Music, the App Store, and iCloud all hit new quarterly record revenue numbers. iCloud storage revenue grew more than 50% over the past year to hit a new record. And AppleCare revenue grew at its highest rate in five quarters. Apple said in 2016 it would double its services revenue by 2020, and Tim Cook said the business is on track to do it.
Apple has known for years that the crazy success of the iPhone wouldn’t last forever, and that it would need some other business to pick up the slack. This is brought into even sharper focus with more news this week about the declining global markets for smartphones and tablets.
Selling digital content and services is a natural for Apple because it takes direct advantage of the more than a billion devices already in use out in the wild. The iPhone (and other iDevices) are, in effect, like little vending machines for digital services like Apple Music, Apple Pay, Siri, iCloud, and other services.
With that many vending machines in use, and the variety of digital services Apple could potentially sell through them, the market opportunity is just huge. Could Apple’s services business become bigger than its hardware devices business?
By the looks of things we’re heading that way. Apple content and services are delivered to users from huge data centers. Apple now has data centers in Maiden, North Carolina; Reno, Nevada; Mesa, Arizona; Newark, California; and Prineville, Oregon. The company has announced plans for another data center in Waukee, Iowa, as well as one in Ireland, two in Denmark, and two in China. I recently visited the one in Reno and can attest to their sheer size and capacity. Apple’s data center space is growing far faster than the manufacturing space it uses to build iPhones and other Apple devices.
New Apple Services
Apple was hesitant to use a subscription model for music before it finally launched Apple Music; now Apple Music has more than 40 million paying subscribers. And there’s a lot of opportunity to move into new subscription services areas. Apple could (and is aiming to) offer a new subscription-based TV service–some of the content of which could be acquired by Apple itself. It could offer a service that collects and organizes all your medical data. Apple could turn itself into something like Amazon Prime, which provides a series of handy services that make life a little easier. Apple could double down on privacy by providing some kind of secure personal data vault for all kinds of data, not just data collected by Apple devices or services.
And let’s not forget the Apple Watch. As the number of those devices out in the wild grows (probably around 40 million today), so does the opportunity to deliver digital services that work especially well on a wrist-worn device. Apple Pay is already a great example. On the analyst call earlier this week, Tim Cook pointed out that using the Apple Watch to wirelessly pay for public transportation has become extremely popular in Japan. Why it hasn’t been enabled for use in more urban transportation systems in the U.S. is beyond me.
Another hugely promising use case for the Watch is in healthcare systems. Nothing is more personal than a person’s healthcare data, and there’s a movement afoot to put more control over that data in the hands of users (rather than walling it all off on health provider servers). That’s exactly the thinking behind Apple Health Records, an expansion of the Health app in iOS that allows patients to see a subset of the data in their electronic health record (EHR). This includes things like allergies, medications, conditions, and lab results.
Ideally, all this vital information could be bundled with other financial information and delivered via a pass of the device over a reader at the clinic or hospital. In other words, the patient could, at one stroke, verify their identity, validate that their own health record data matches that on the health system server, transmit insurance information, pay a copay, and possibly even transmit a digital signature for forms and releases. The Watch could be used for distributing timely follow-up or after-care information and instructions to patients.
At many hospitals and clinics, the process of exchanging all kinds of clinical and financial data with the patient is wildly inefficient, redundant, and prone to error. Apple could play a key role in improving the process for both the healthcare consumer and for the providers. And this is to say nothing of the Watch’s potential role of using its sensors to collect meaningful clinical data from the wearer’s body for clinicians.
Before Apple announced earnings this week, many in the analyst community were worried that sales of Apple’s top of the line phone, the $1,000 iPhone X, were flagging. Apple largely quieted those fears by reporting better than expected iPhone sales during the first three months of 2018.
But the good news about the progress of the services business surely enhanced the calming effect. Services provides a much needed pressure offtake valve for the phone business, and it might well become much more than that in the future.
As that happens, “Services” may exert its gravitational pull on the phone business. The features included in each iPhone build may become more strictly driven by the services the device is meant to deliver. It’s also possible that the prices of iPhones could be driven downward as Apple becomes as concerned about populating the market with lots of “vending machines” as it is about profiting from the phones themselves.
In the long term, Apple’s services business may end up being a big part of the Tim Cook legacy as the thoughtful steward of the Jobsian vision. Steve Jobs envisioned and realized the jackpot that is the iPhone, but Cook may be the guy to make it pay and pay.