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Why Is Apple Shifting Its Focus from Hardware to Services?

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Apple’s sluggish iPhone sales

Apple (AAPL) has been grappling with soft iPhone sales, which have been hurting the company’s total revenue. Its iPhone revenue fell ~15% YoY (year-over-year) in the first quarter of fiscal 2019 (which ended in December 2018), which in turn led to a 4.5% decline in the company’s total revenue.

Weakness in demand for iPhones led to a fall in Apple’s sales. Sky-high prices, a lack of new features in its new models, fewer upgrades, its battery replacement program, the slowdown in China, and tariff fears all contributed to Apple’s sluggish iPhone sales.

Soft demand of the latest iPhone models also dented the businesses of Apple’s suppliers, including Lumentum Holdings (LITE), Qorvo (QRVO), Universal Display, Cirrus Logic (CRUS), and Skyworks Solutions (SWKS). The weakness in iPhone demand also affected chip stocks such as Broadcom (AVGO), NXP Semiconductors (NXPI), and Micron Technology (MU).

Services business is growing

Amid weakness in its most popular product, the iPhone, Apple has intended to shift its focus to other growth metrics. Apple’s Services segment is its second-largest business after the iPhone, but it’s gaining momentum. The Services segment includes iCloud storage, the App Store, Apple Care, Apple Pay, and Apple Music.

The Services segment posted revenue growth of 19.1% YoY to $10.8 billion in the first quarter, in line with the expectations of Apple’s CEO, Tim Cook. The company has reported double-digit revenue growth in the Services segment for the past 15 straight quarters.

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