Apple’s Service Offerings Could Drive New Profits to Apple’s Bottom Line

I have been going to Apple launch events for 38 years. Until this week, all have either been hardware or software related with a few service program announcements sprinkled in here and there.

Apple’s Showtime event last Monday was the first one that strictly focused on services by themselves and was designed to clarify how four new service products would aggregate content and allow them to get a piece of the action from the various subscriptions or financial transactions tied to these advanced service offerings. While the event focused on services, the underlining message was an economic growth that bodes well for Apple’s future.

One of the big issues PC vendors struggled with from the beginning of the PC industry, especially those who sell hardware, is that once they sell a PC or peripheral to a user, that is the end of the sale. The exception to this rule was in the printer industry which had a razor/razor blade model where the hardware became a vehicle to sell more ink as long as a person owned that printer. PC vendors tried various ways to provide add-on, recurring revenue models, but never hit on a true recipe for extending their sale beyond the initial purchase of a PC.

Apple perfected the recurring revenue model when it introduced iTunes. When the iPod first came out, you had to actually rip CD’s into the iPod to get your digital music. But once they got the music industry to back their music downloads, Apple delivered the first solid model for gaining additional revenue from a piece of hardware. This eventually begat streaming music subscriptions, and Apple has now added streaming music as a significant leg of their broader services offering.

When the iPhone came out, Apple launched its App Store, and with it, the iPhone revolutionized the smartphone world. The App Store gave Apple another leg in its services offering and delivered another service for aggregated content.

A few years back, Apple introduced Apple Pay. On Monday they added Apple Card, their first credit card, backed by Goldman Sachs. It is tied to Apple Pay, and they did away with late fees and penalties and added Daily Cash benefits that are real cash given to users when purchasing products via Apple Card.

Last year Apple bought Texture, the magazine aggregator that has now become the backbone of their News+ News service that combines magazines and newspaper subscriptions into a single $9.99 bundle. While they only announced a few big name newspapers like the WSJ and LA Times for now, if this service takes off, many other mainstream newspapers who have their own subscriptions services could eventually join Apple News+ some day.

The reason they will be watching this is that even with the success of the New York Times and Washington Posts current subscription program to date, should Apple gain a hundreds millions of News+ subscribers over the next two-three years, they would give these and other holdouts millions of new eyeballs to view their content. Even if Apple got 30-50% of the speculated fees the newspapers give up to be on Apple’s News+ platform, the additional revenue would be more than incremental and make them solid new revenue from people who would never subscribe to their papers alone. Also, it would allow them to drive up ad rates. The New York Times has 4 million paid subscribers today, and their ad rates are tied to these numbers. But let’s say that over the next two-to-three years, Apple gets 50-60 million subscribers to Apple News+ and could deliver that many new eyeballs to the New York Times. Would they not want to join this new service? You can bet that a lot of newspapers are going to be watching this space closely.

Apple also launched a new gaming service called Apple Arcade. They have not priced it yet, but when it comes out this fall, it will have 100 games made exclusively for Apple’s Arcade gaming subscription.

The Showtime focus of the event was the new Apple TV+ offering. Apple brought A-Listers from Hollywood to the event to talk about Apple’s new platform for creative storytelling and is clearly going to invest billions of dollars into creating original content. However, Apple TV and Apple TV+, which will have the original content, is also an aggregator of TV and movie content. While Apple did not announce pricing, which is the billion dollar question, the reality is that whatever they price it at it will be another subscription service that can deliver revenues to their bottom line.

Apple now has six unique offerings under services that have one common economic theme. Each gives Apple a cut of the revenue brought through these transactions or subscriptions. Apple’s services business was $37 billion in 2018 and on pace to be more than $40 billion in 2019. Apple’s hope is to make services a $50 billion a year business in 2020 and that goal seems on track. If anything, these services could help accelerate their business ambitions.

While a lot of people were critical of these announcements in that Apple did not spell out the price of their Apple Arcade and TV+ service, and left a lot of questions about their services open, you can expect them to be priced competitively. While not everyone one will subscribe to all of these six recurring revenue services, Apple is now giving users new choices of aggregated content that is economical and can meet the various needs of their overall customer base.

One other theme that is equally important about Monday’s event was Apple’s emphasis on the privacy that comes with each of Apple’s services. This is a major differentiator between Apple and some competitors. Yes, with Apple you pay for services and this iron clad privacy.

Apple also has another thing going for them, and Oprah Winfrey nailed it when she said: “Apple has a billion pockets y’all”. All Told Apple has over one billion active users of IOS and Mac OS devices to target for these new services. And Apple’s marketing programs are legendary. While these new services most likely will start with small audiences at first, they have the potential to grow and become a powerful engine to fuel Apple’s bottom line growth. The Mac, iPhone, and iPad will also be important products, and Apple will continue to innovate around these hardware devices. And I believe that Apple will have the next major industry disruptor once they bring out their AR glasses and build a base of AR apps to drive its usefulness and growth.

I think we will look back on Apple’s Showtime event as a very important milestone in Apple’s history. I believe it launched the era of services being a more powerful force in Apple’s revenue model and with these new services it brings to Apple’s customer’s many new choices to keep them in the Apple family.