Apple has an iPhone problem. After a decade and a half of runaway growth, global ubiquity, massive revenues, and planet-scale value creation, the iPhone has matured. Global saturation for the device (and the broader smartphone category) has led to revenue deceleration and, in some cases, declines.
This trend has built up over the past few years so it isn’t a new phenomenon today. But it continues to show signs in Apple’s financial performance. Looking at its fiscal Q3 earnings (which is the calendar-year Q2), iPhone revenue is $39.67 billion, down $.99 billion year-over-year from $40.66 billion.
But there’s also good news. That revenue decline was more than offset by some of Apple’s emerging categories such as wearables and, most notably, services. The latter alone covered the gap in the iPhone’s revenue decline, to the tune of $1.6 billion in year-over-year growth to $21.2 billion.
Good Problem to Have
Drilling down further, services – consisting of premium content subscriptions like Apple TV+ and Music – reached a billion users in fiscal Q3. And more importantly, it now accounts for 25 percent of total revenue. This basically means that the category is doing its job as a revenue diversification engine.
Beyond revenue diversification, Apple’s services division accomplishes another key Big-Tech imperative: massive markets. In the “good problem to have” category, tech giants have to shoot for massive targets to make a dent in their revenue growth figures. This involves the law of large numbers.
As we often discuss on This Week in Local, the challenge is achieving meaningful percentage growth, given such a large denominator (last period’s revenue). That doesn’t happen through incremental markets and marginal wins, such as pressing harder for growth within existing products.
Ep. 11 Examines BigTech’s Old Shiny New Thing — Subscriptions
Moves & Machinations
Apple-scale growth rather requires massive revenue streams. This is why you see Amazon going after healthcare, Apple going after entertainment, and so on. These are sectors with large enough addressable markets to feed the beast for scaled revenue growth. And there are relatively few of them.
So Apple has found a successful market entrance and growth path in entertainment and premium content services… the question is what’s next? As we discuss on this week’s episode of This Week in Local (which drops Monday), the answer is likely banking. The clues for that are all around us.
And this diabolical plan started in 2014 when Apple launched Apple Pay. Since then it continues to bolt on more reinforcing capability, including digital wallets, credit cards, and savings accounts. Stay tuned for the episode and ongoing analysis as we watch Apple’s machinations, and triangulate its next moves.
