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Service Segment Now Makes Up a Fifth of Apple’s Revenue

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Apple made a record $11.45 billion from services

Apple’s (AAPL) market cap breached the $1 trillion mark once again, albeit briefly, as markets were optimistic about Apple’s under-par earnings report. The company generated revenue of $58.0 billion in the second quarter of 2019 (quarter ended March 2019), a 5.1% decline YoY. The tech giant’s iPhone revenue fell 17.4%.

However, sales were boosted by its services division, which generated a record $11.45 billion in revenue, up 16.2% YoY. Services, which include Apple Music, the App Store, iCloud, Apple Pay, Apple Care, and iTunes, among others, now make up 19.7% of the company’s overall revenue compared to 16.1% in the corresponding period last year. However, as the graph shows, the growth in the division in the last three quarters has been substantially lower than it has seen previously.

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Apple will soon be building on its services

Apple says it now has an impressive 390 million paid subscribers across all its services and expects that number to cross 500 million by next year. The company unveiled a number of services last month, including its much-awaited streaming service, its news subscription, and its own gaming platform.

While services made up nearly a fifth of the company’s total revenue in the quarter, its gross profits made up a third of Apple’s gross profit. This means that services are more lucrative than its iPhone business.

However, this might change in the future. While Apple’s upcoming video streaming service would add to the services revenue in the next few years, Apple may have to spend billions on content for years to match Netflix’s offerings. While Apple definitely has the means to do so, it will squeeze the margins of Apple’s services business.

Apple’s future growth will likely lie outside iPhones. But the company is now focusing on monetizing the current iPhone installed base, rather than increasing the installed base, and the company has the resources to do so, which is probably why the stock rose 4.9% on Wednesday, May 1, despite a fall in revenue and earnings.

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