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A Look At The Apple Services Business

Feb 12, 2019
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Today brings a few tidbits of news concerning Apple’s (NASDAQ:AAPL) growing services segment. Apple seems to be very keen to keep this business growing as its hardware sales begin to slow down worldwide.

Apple wants to roll out a new premium paid-for News service

First, we received word that the Cuppertino, CA-based company is eyeing a new news subscription service that would be an all-you-can-read service spanning multiple publications. Apple has attempted to sell the idea as a ‘Netflix for news’ type service to publishers who have thus far bristled at the idea of the company taking a large stake of their revenue stream.

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The problem, according to publishers, is that Apple plans to keep 50 percent of the revenue for its premium news service, and the other half would be dispersed to publishers based on how much times readers spend on their respective articles.

The WSJ typically charges $20 for online access to its articles, and Apple wants to give users this content for a better price somehow.

Users would be asked to fork over $10 a month to enjoy the paid-for Apple News app, and would be privy to a slew of articles typically hidden behind paywalls. Its not very clear just how Apple will convince publishers to hop on board considering that The Wall Street Journal, for example, charges $20 a month per user just to read its content.

Goldman Sachs Warns Apple’s service revenue from Google is slowing

Next, Goldman Sachs (NYSE:GS) warned that the company’s service revenue, which grew by 19 percent last quarter, may be increasingly over-reliant on Google (NASDAQ:GOOGL) for growth. Google contributed about $9.5 billion in traffic acquisition costs to the iPhone manufacturer. TACs are essentially fees Google pays to remain the default search service in say, Safari’s search bar.

Safari and its default Google search

Apple did around $37 billion in services revenue in 2018 so Google’s contribution is quite large, both in relative and absolute terms. GS analysts predict that TACs from Google will eventually flatten out and so Apple must find new ways to grow the services business.

“Not only is TAC large but it is still growing as people search more on mobile devices,” the analysts said. “Combining our TAC work with app store data from Sensor Tower we conclude that TAC and Apple’s share of app store downloads represented 51 percent of Services revenues in 2018 and an even larger 70 percent of Services gross profits. Both of these elements should grow in 2019 albeit TAC looks likely to decelerate materially.”

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Last year I wrote a piece detailing just how quickly Apple’s services were growing. The company expects Service revenue to exceed $48 billion per year by 2020 and the novel News service discussed today could be one of the ways they get to that ambitious target. Last Autumn the world got wind of Apple’s upcoming ‘Prime-esque’ premium video service that would be rolling out this Summer in 2019, and its obvious Tim Cook and company are doing all they can to hedge against lagging hardware sales. If Google’s TAC contribution does indeed begin to slow then Apple simply must find a way to continue to grow its service revenue.

Microsoft (NASDAQ:MSFT) is perhaps the best example of a traditional software and hardware company successfully pivoting to a more services-oriented one, and its paid dividends for them. Microsoft stock has doubled in the last three years, partially as a result of their success in offering services like Office 365 and Azure cloud services.

Apple is doing all its can to follow in those footsteps and we should have a pretty good idea of their progress by the end of next year.

 

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