February 28, 2021 at 4:51 p.m.
- Apple’s first fiscal quarter of 2021 ended with the company taking in $111.4 billion in net revenues — an all-time record.
- Device sales accounted for the bulk of Apple earnings, with $96 billion in net revenues.
- Services, such as Apple TV+ and fees paid by Google for default search, accounted for almost $16 billion in net earnings.
- Apple’s services grew almost 24% compared to the same quarter last year, while products increased by 17.3%.
Apple Services Grow in Q1 2021
Although the iPhone continues to deliver the bulk of Apple’s revenues, a specter of market saturation plagues Cupertino. The iPhone has a lot of room to grow, particularly in India; however, the iconic smartphone faces worthy competition from Android handsets.
Services are critical to Apple’s continued growth, with monthly subscriptions providing stable, sustained revenues. Investors adore corporations like Netflix, as its subscribers pay monthly fees instead of purchasing a device every few years. Subscribers are predictable, and Netflix’s compelling content helps it grow reliably.
Services revenues are more stable, with higher profit margins than other businesses. Sales costs account for 32% of services revenues, while they devour up to 64% of product earnings. Services cost less to sell because they’re virtual and distributed electronically. Beyond a data center, there’s no need for a warehouse. There’s also no physical manufacturing with services. At most, Apple funds the production of original content and designs simple apps for its consumption.
Services continued to grow for Apple in Q1 of 2021. With much of the public under stay-at-home orders, subscriptions increased by 140 million compared to last year’s first quarter. With over 600 million subscribers, Apple has room to grow.
The company recently surpassed one billion iPhones in use, with 1.65 billion active Apple devices. Every iPhone, iPad, or Mac owner is a potential subscriber. Along with Android devices, which can use Apple Music, Apple services could reach billions of customers globally. Apple must overcome entrenched competitors to grow subscriptions.
What Services Does Apple Have to Offer?
Apple is one of the first tech companies to offer digital services to consumers. Shortly after the iPod debuted in late 2001, Apple launched the iTunes Store. The endeavor intended to counter Napster, which eroded music industry profits. The iTunes Store continued to grow, adding video purchases and rentals shortly after Apple upgraded the iPod with a color screen.
Services took a back seat, as the iPhone phenomenon caused Apple to shift attention to its flagship product. Beyond iCloud, which offered online storage for Apple devices, the company focused mainly on its smartphone. Streaming companies like Netflix, HBO, and Spotify grew to dominate the video and music subscription business. As iPhone sales began to plateau, the company took a renewed interest in services, launching Apple Music in late 2015.
Aggressive free trials and other perks saw Apple Music grow to challenge, yet not surpass, Spotify. Despite on-device marketing and development of an Android app, Spotify remains the streaming music leader, with almost twice as many subscribers as Apple Music.
Apple’s resolve to grow services produced new offerings such as Apple Arcade, Apple TV+, Apple News+, and Apple Fitness+. The company also folded a sweetheart deal with Google search into its service revenues. Google’s payment to Apple is a significant source of service revenues. The agreement allows Google to be the default search engine on Apple devices.
Google Search Payment Included in Apple Service Revenues
Google’s default search deal with Apple became prominent when the US Department of Justice filed a lawsuit over its anti-competitive nature. Google pays Apple up to $12 billion a year to promote Search on its devices. Given that Apple services for last quarter accounted for $16 billion in revenues, Google’s payment seems to account for over 20% of these earnings.
iCloud May Bring in Over $5 Billion a Year
iCloud, a relatively old and unexciting offering, makes up a large portion of Apple service revenues. Unlike its physical products, Apple doesn’t break down individual service revenues.
Forbes estimates that iCloud earned $4.5 billion in 2019. If this stayed the same or grew in 2020 and 2021, iCloud accounts for a significant portion of service revenues. This means that Apple’s newest services still haven’t caught on. Apple Music is now over five years old, but it can’t compete with Spotify.
It’s likely Apple is reluctant to break down service revenues because they’re not impressive. When a large portion of service revenue comes from older offerings, it’s clear that Apple is facing stiff competition from entrenched rivals.
Lucca Maestri Admits Services Inflated Due to Pandemic
Stay-at-home orders due to the global pandemic benefit some corporations. Apple is one of the biggest beneficiaries of a sheltered global population. People working from home need new laptops, tablets, and smartphones. They need services to entertain them. Apple is well aware that the pandemic inflated services for Q1 2021. According to Apple CFO Lucca Maestri:
“During the March quarter last year, we saw elevated activity now, with digital services as lockdowns occurred around the world, so our services business faces a tougher year-over-year comparison.”
Although it’s spun as a positive, the pandemic hit its peak in Q1 2021. More people were under stay-at-home orders during this time than in previous quarters. COVID-19 was a mere threat in Q1 of 2020. A year later, it killed thousands of Americans every day, with only essential businesses remaining open. This past quarter was a boon for Apple services. The 24% increase could be considered unimpressive, given the circumstances.
The iPhone is still Apple’s breadwinner, and, for now, that’s not a problem. Apple faces an uphill battle to beat entrenched services like Netflix. Apple TV+ seems to admit defeat, with a $4.99 per month fee. At best, it can be an adjunct to Netflix, not a replacement.
As visionary as Steve Jobs was, he failed to see the colossal potential of streaming services. Focused on the iPhone and derivative products, Tim Cook neglected to invest in Netflix and Spotify killers. After five years, the company remains unable to compete with Spotify, a comparatively minuscule entity.
People need a compelling reason to switch from Spotify to Apple Music or Netflix to Apple TV+. The Apple logo isn’t enough. Perhaps persuasive original content and exclusive deals, easy accomplishments for Apple, could make its offerings must-haves.