Date
18 August 2018
Apple CEO Tim Cook appears to be shifting the company's growth engine from hardware to services as consumers tend to delay smartphone upgrades and spend more on content and services. Photo: Bloomberg
Apple CEO Tim Cook appears to be shifting the company's growth engine from hardware to services as consumers tend to delay smartphone upgrades and spend more on content and services. Photo: Bloomberg

Apple turning to services for growth

Apple has once again proven its superiority in the technology business by delivering double-digit growth in revenue and earnings for its third fiscal quarter ended June 30.

The pricey iPhone X was the key driver behind the figures, even though smartphone shipments rose only 1 percent from a year earlier. It appears, however, that the tech giant is shifting its growth engine from hardware to services as consumers tend to delay smartphone upgrades and spend more on content and services.

The strong earnings sent Apple’s share price to the US$200 level on Wednesday, taking its market value closer to the US$1 trillion mark.

But investors should bear in mind that the company’s double-digit growth for the period was mainly due to a low base of comparison. It had not started selling iPhone X until November last year. The huge year-ago difference would no longer exist once Apple launches the successor to the iPhone X at a similar price range.

Apple, therefore, must convince investors that it is still capable of achieving such high growth after iPhone X.

During an investor conference call on Tuesday, Apple’s chief executive Tim Cook spent quite a lot of time on the company’s services revenue. He said Apple had achieved an all-time record services revenue of US$9.5 billion and was on course to reach the goal of doubling its fiscal 2016 services revenue by 2020.

Excluding one-off items, the underlying growth rate of its services business was 28 percent over last year. The strong figures were driven by strong performance in paid subscriptions from Apple and third parties, App Store, Apple Music, AppleCare, iCloud storage and Apple Pay.

Apple Music grew 50 percent year on year, Cook said, corroborating previous reports that Apple Music is now the biggest streaming service in the United States.

Cook also said there were over a billion Apple Pay transactions during the reporting period, triple the volume just a year ago. Regarding mobile transactions, Cook said there were more mobile Apple Pay transactions than mobile PayPal transactions.

Apple is likely to launch more services to enhance users’ stickiness to the entire iOS ecosystem. It is expected to launch a news subscription service after it acquired Texture, an online magazine subscription platform.

Apple is also busy preparing for its original video content production. Early this year, the company announced that it had reached a unique, multi-year content partnership with Oprah Winfrey and promised to come up with original programs that would capitalize on her incomparable ability to connect with audiences around the world. Apple said Winfrey’s projects would be released as part of a lineup of original content from Apple.

While Cook did not elaborate on the Winfrey partnership, he said cord cutting was only going to accelerate and probably at a much faster rate than widely thought, as unit sales and revenue from Apple TV grew by very strong double digits during the reporting period.

He also said many video channels were riding on Apple TV to provide subscription services, reflecting the dramatic changes happening in the content industry.

What Cook is apparently trying to say that Apple is undergoing a transformation from a hardware-focused business to a service-based company.

Of course, services won’t surpass hardware in terms of revenue generation in the short term, given that the iPhone, iPad and Mac are still important products in the consumer electronics market. But in the long term, smartphone sales could remain sluggish and people are not expected to upgrade their phones at such a short period of time.

In order to sustain growth, Apple needs to generate new revenues from users who are using their old phones and tablets. Such a wide and varied ecosystem for Apple’s community is the best defense against the growing challenge posed by Chinese smartphone makers like Huawei, which surpassed Apple in the last quarter to be the world’s No. 2 smartphone maker by shipment.

After all, in the increasingly saturated smartphone market, Apple is not competing on quantity but the quality of services it provides to its loyal users.

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CG

EJ Insight writer

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