Bloomberg Casts Doubt on Apple Services

image credit: Bloomberg

By Chand Bellur

July 28, 2020 at 5:22 p.m. PT

  • iPhone sales are in decline as worldwide smartphone markets reach saturation.
  • Apple’s pivot into services has so far pleased investors; however, free trials and creative accounting may be inflating subscription numbers.
  • A new report from Bloomberg points out that Apple’s service revenues aren’t as lucrative as once thought.

iPhone Sales in Decline

The iPhone is the original smartphone. Although Apple is no longer the only option, it manages to stay competitive with the Android ecosystem, which offers free smartphones.

The problem with smartphone technology is that it has plateaued. Everything most consumers could ever want in a smartphone already exists, and has for years. Manufacturers add more camera lenses and superfluous features, however, consumers are holding on to their smartphones longer than before.

Researching the issue, it appears that every year, consumers choose to hold on to their existing smartphone for a few more months. While there are myriad reasons for this behavior, smartphone technology is stagnant these days.

Furthermore, the smartphone market is saturated. Years ago, consumers were converting from basic feature phones to smartphones. Apple ended up with many new customers; however, not everyone buys a new smartphone regularly. With a saturated market, Apple can only sell to upgraders or platform defectors.

Apple seems interested in making more affordable iPhone models in an attempt to convert Android customers. The new iPhone SE accomplished this goal; however, it still isn’t enough to grow revenues for the Cupertino tech giant. Apple’s recent pivot into services intends to increase revenues; however, there’s some recent doubt surrounding the new strategy.

Apple’s Services Push Stalling

Investors had high hopes in Apple’s new service strategy. The company unveiled a few new services over the past years, aimed at offsetting declines in iPhone sales. With free subscriptions and creative accounting, the strategy seemed to work. A recent Bloomberg report, however, sheds new light on Apple’s services strategy.

The latest estimates indicate that Apple’s biggest service revenues come from the App Store and their search deal with Google. Bloomberg reports that Apple Arcade, Apple TV+, Apple News+, and Apple Music make up a small portion of revenues. Even selling iCloud storage space brings in more revenues than Apple Music.

It’s important to realize that Bloomberg’s report is an estimate. Apple, like most large, multinational corporations, plays a shell game with profits. Even with lower corporate taxes, the bulk of profits hide in offshore tax havens. The company can reallocate these profits and make it seem like they’re more successful every quarter.

Apple Needs a New Flagship Device

Apple is a hardware company. Although the iPhone maker recently moved into services, the market is already full of strong competitors such as Netflix, HBO and Spotify. It may be that their push into services is too little, too late.

Aside from creative accounting, the only thing that can save Apple in the long term is another blockbuster device. The company’s wearables strategy has been enormously successful, with the Apple Watch and AirPods leading the industry. Unfortunately, both of these devices have limited appeal and smaller profit margins than smartphones or tablets.

The Macintosh is another area where Apple could do better. Recent problems with defective keyboard mechanisms and faulty screen cabling forced many Mac users to stick with their older models. With Apple finally abandoning its Ahab-like obsession with thinness, the Mac is once again a machine worth purchasing.

Apple is due to release third-quarter results in a few days. They may release stellar results. After all, with profits hidden in offshore tax havens, the company has a wide berth to adjust gains and please investors. This can only go on for so long. Eventually, Apple needs a new, breakthrough device, or investors will begin to question the financials.

 

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