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How Profitable Is Apple’s Service Business?

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Record service revenue

There is a lot of investor attention focused on Apple’s (AAPL) service business and for good reason. As the smartphone market becomes saturated and it becomes difficult for Apple to sell new iPhones quickly, the company is banking on its service business to drive growth. At the same time, the service business provides an avenue for Apple to monetize its growing installed device base. There were 1.4 billion active Apple devices worldwide at the end of 2018, of which 900 million were iPhones.

Apple generated $10.9 billion in service revenue in the December quarter, an increase of 19% YoY. The company called the service revenue a quarterly record and said it was on track to meet its goal of generating as much as $50 billion in annual service revenue by the end of 2020.

Apple also said its service gross margin increased to 62.8% from 58.3% in the year-ago quarter. Apple’s overall gross margin was 38% in the December quarter, indicating that the service business is a huge profit engine for the company.

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Apple Music exceeds 50 million paying subscribers

Apple’s service business consists of multiple units including mobile payments service Apple Pay and streaming music service Apple Music. The company said it made gains across its various service categories in the December quarter, adding that its Apple Music service had surpassed 50 million paying subscribers. That still puts it behind Spotify (SPOT) whose music service had 87 million paying subscribers at the end of the September quarter. Pandora had 6.8 million paying music subscribers at the end of the September quarter. Pandora recently completed its sale to Sirius XM (SIRI) for $3.5 billion.

Apple has taken to partnerships to try to extend the reach of its Apple Music service. Last year it struck a deal to bring Apple Music to Amazon’s (AMZN) Echo devices. It also works with Verizon (VZ) on a program that bundles Apple Music subscription with some of the operator’s unlimited wireless plans.

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