Apple’s (AAPL) Services segment has been a key driver of its sales for quite some time now. The segment has managed to grow its sales at an enviable rate over the years, and it’s now Apple’s second-largest business segment.
According to Statista, Services accounted for 6.5% of total sales in Apple’s first quarter of fiscal 2012. By the end of the fourth quarter of fiscal 2012, Services accounted for 9.7% of total sales. The segment ended the fourth quarter of fiscal 2013 with a total revenue share of 11.4%. This figure stood at 11%, 9.9%, 13.5%, 16.2%, 15.9%, and 19.5%, respectively, in the fourth quarters of fiscals 2014, 2015, 2016, 2017, 2018, and 2019.
Apple’s Services segment
The Services segment includes the App Store, Apple Music, Apple Care, Apple News+, Apple Arcade, iCloud, Apple Card, and Apple Pay.
The App Store might just be the Services segment’s key driver—and for good reason. It generates sales from mobile applications that have risen at an exponential rate over the years. A Sensor Tower report forecast total mobile consumer spending to be $21.9 billion in the September quarter, year-over-year growth of 22.9%.
In the previous year’s quarter, mobile consumer spending was estimated to be $17.9 billion. The App Store accounted for $14.2 billion in sales, or 65% of total mobile spending, in the period. Apple’s App Store sales growth was estimated to be 22.3%, up from $11.6 billion in the previous year’s quarter.
Google’s Play Store saw its sales grow 24% YoY from $6.2 billion to $7.7 billion in the third quarter. Apple’s App Store accounted for the majority of its mobile sales despite the iPhone having a market share of approximately 13% in the global smartphone space.
Mobile gaming continues to drive App store sales
The global growth in mobile gaming continued to positively impact mobile store sales in the third quarter. Sensor Tower estimated total mobile gaming sales of $16.3 billion, up 20% YoY up from $13.6 billion. Mobile gaming accounted for 74% of total application spending.
Mobile spending from the App Store was expected to grow by 19% to $9.8 billion, accounting for 60% of total gaming spending. The five top games in terms of mobile revenue were PUBG Mobile, Honor of Kings, Fate/Grand Order, Pokémon Go, and Monster Strike.
The other top apps that raked in revenue for the App Store included dating app Tinder and streaming platforms such as Netflix, YouTube, China’s iQIYI, and Tencent Video.
These trends indicate that App Store revenue will continue to grow sales at a solid pace in the long term. The addressable market for mobile gaming and online streaming continues to increase and will hold AAPL in good stead.
Services growth will remain strong
According to gaming research company Newzoo, the mobile gaming market is estimated to grow by 10.2% YoY to $68.5 billion in 2019. This figure is expected to reach $95.4 billion by 2022.
Similarly, as the number of streaming services continues to grow, it will be supported by a rising number of subscribers. Tech heavyweights Apple, Disney, AT&T, and Amazon are investing heavily in original content to increase their subscriber bases.
The cord-cutting phenomenon continues to affect developed markets in North America and Europe. The increase in Internet users in the emerging markets of India and Southeast Asia will help boost streaming subscriber growth.
The video streaming market is expected to grow at an annual rate of 19.6% between 2018 and 2025. It’s estimated to reach $124.57 billion by the end of the forecast period.
In the fourth quarter of fiscal 2019, Apple’s Services sales totaled $12.5 billion. Even after considering Apple’s 30% cut from the App Store, this amount means net sales of $4.26 billion. Therefore, the App Store accounted for approximately 34% of the company’s Services sales in the quarter. The Services segment continues to invest heavily in high-growth markets and is poised for long-term growth.
AAPL launched mobile gaming subscription service Apple Arcade recently. Last month, it also launched Apple TV+, marking its entry into the streaming space as well. Apple Pay continues to gain traction in the mobile payment segment. Further, the Apple Card, which launched in partnership with Goldman Sachs, may well disrupt the credit card space.
All these factors should contribute to stellar Services growth in the next decade. In 2018, Morgan Stanley analyst Katy Huberty said she expected the Services segment to reach $100 billion in sales by 2023.