Why Apple’s Focus Is Shifting to Services Revenue

Hardware upgrades are hitting peaks

Although Apple (AAPL) has recently struggled with falling iPhone sales amid the stalling growth of global smartphone market, Apple investors can find hope in the company’s promising software and services business. Apple not only posted a 22% growth in its services revenue in fiscal 2016, but its App Store sales also expanded 40% globally and 90% in China—a sign of growing consumption of its iOS apps.

Why Apple’s Focus Is Shifting to Services Revenue

With handset manufacturers struggling to make radical improvements on their devices, software innovation is expected to dominate future smartphone upgrades.

Artificial intelligence driving software boom

Advances in AI (artificial intelligence) are particularly expected to spark a boom in the development of software and services for smartphones and other smart gadgets. AI is empowering smartphones to play increasingly important roles in healthcare, entertainment, and IoT (Internet of Things) such as monitoring health, streaming video, and controlling home automation devices like Amazon’s (AMZN) Echo and Alphabet’s (GOOGL) Google Home.

The anticipated strong demand for software and services to secure and expand the capabilities of smartphones and IoT gadgets partly explain BlackBerry’s (BBRY) shift in business strategy. The company has abandoned making handsets to focus on software.

Apple’s services revenue doubles in four years

As for Apple, services revenue rose to $24.3 billion in fiscal 2016, supported by strong App Store sales. Other than App Store, Apple’s services business also includes Apple Pay and Apple Music, a streaming music service that competes with Spotify and Pandora (P). According to Apple head Tim Cook, the company’s services revenue has almost doubled in the last four years and is poised for more growth.

Worldwide smartphone shipments grew only 0.6% in 2016, as compared to 10% in 2015, according to IDC. But the slowing growth of smartphone market has intensified the competition for market share among Apple, Samsung (SSNLF), Alphabet, and other rivals.