The iPhone Economy

on January 29, 2015

Apple’s earnings this week were such that it’s almost impossible not to be distracted by the sheer scale. However, since that’s been well covered every where the last couple of days, I wanted to focus on a particular way of looking at Apple, which I suspect fits well with where the company will go in the coming years. I’ll start with this chart, which is a datapoint you probably won’t have seen anywhere else – it’s the total revenue Apple generates as a company divided by the number of iPhones sold. Note: it’s not iPhone revenue per iPhone sold (i.e. average selling price), but the total revenue from all products and services per iPhone sold in each quarter:

Revenue per iPhone soldWhat I want to look at today is the degree to which the iPhone has become central to the Apple ecosystem and the degree to which Apple can essentially be seen as the iPhone company. To some extent, we can also begin thinking about “the iPhone economy” as existing beyond the confines of Apple itself. What the chart shows is Apple is starting to stabilize at around $1,000-$1,100 per quarter per iPhone sold in total revenue. Now, iPhones themselves account for somewhere between $600 and $700 of that $1000, but the rest is made up of other devices and services and that’s where I want to focus our analysis.

Other devices – today

About 30% of Apple’s unit shipments in the quarter were something else – iPads, Macs and a few iPods. As the iPod goes away, the other devices are essentially becoming companions to – or extensions of – the iPhone. I’d bet a very high percentage of iPad and Mac owners are also iPhone owners and, with concepts such as Continuity and its implementation in features such as Handoff, the iPhone is becoming more and more interconnected with those other devices. These devices will largely be sold in future to iPhone owners and their interconnectedness with the iPhone will make them more and more attractive purchases, which will have a positive effect on sales over time (witness what’s happening with Mac sales, in contrast to the broader PC market). Today, these other devices make up about 25-30% of Apple’s revenue in an average quarter.

Other devices – tomorrow

But of course these aren’t the only devices Apple will be selling going forward. With the launch of the Apple Watch in April, Apple will have another companion device to the iPhone – the first to be explicitly tied to it (and of very little use without it). The revenue opportunity around the Apple Watch is significant – if it ships 20 million or more in 2015, as I think it might well do, then it could generate $10 billion or more in revenue, contributing about 5% of Apple’s overall revenue after it launches. Over time of course, it’s likely to generate significantly more than that and will make an increasing contribution to overall revenues. Then there are other devices that become part of the iPhone ecosystem: home automation devices connected to HomeKit, other wearables connected to HealthKit and the Health App, and so on. Apple will likely sell many of these in its stores and so capture revenue that way. But it’s also possible Apple will launch some of its own hardware in these categories, further stimulating sales. The Apple TV, of course, is another device tied in many ways to the iPhone, and which plays a role in HomeKit too. If it evolves and Apple manages to move it beyond the “hobby” phase, it too could play a significant role in boosting the iPhone economy.


Then there are accessories – Apple sells lots of these today, though it’s just stopped reporting this number separately. Apple has also acquired Beats, which makes first party accessories for Apple and has the potential to grow and expand over time into other categories. And there are quite a few other segments Apple could expand into over time, within the broad scope of accessories, which could further boost revenues per iPhone sold.

Services and content

Lastly, there are services and content, including iTunes content, the App Stores across iOS and OS X, iCloud, and newer services such as Apple Pay. Assuming Apple is able to turn content performance around with whatever Beats evolves into, each of these has the potential to grow significantly over the coming years and make an increasing contribution to revenues and profits.

Perpetuating astonishing growth

All this is relevant because, even though the revenue per iPhone sold number has been falling, I expect at some point it’ll turn around and start rising again, as each iPhone sale generates not just $650-700 in revenue directly but an increasing amount of ancillary revenue through sales of iPads, Macs, Apple TVs, and Apple Watches, along with iTunes content, apps, Apple Pay, iCloud and a plethora of other products and services. Apple’s December 2014 quarter was astonishing in its scale and the growth it entailed and Apple will continue to feel the effects of the iPhone 6 and 6 Plus launch for several more quarters. But if it’s to generate that kind of astonishing growth going forward, these additional revenue opportunities, adding up to over $1,000 per iPhone sold, will be increasingly important as iPhone growth slows down a bit in a year’s time. But at the same time, these peripherals to the iPhone will help ensure its place as the most attractive ecosystem for both developers and consumers, which in turn should help keep iPhone sales ticking over nicely as well.