Why Apple is touting its active installed device base

January 31, 2019 13:36
Apple believes its huge installed base of active devices will help the firm derive more services income, which can help offset the impact of slowing hardware sales. Photo: Bloomberg

Announcing its results for the three months to December, which marks the firm's fiscal first quarter, Apple on Tuesday revealed a 15 percent slide in iPhone revenue compared to the year-ago period.

With device sales slowing down -- though we don't know the exact number, as the company has stopped providing unit sales figures -- the US tech giant now wants investors to focus instead on another metric: installed base of the phones. 

The message is this: Look at our installed base of devices and you will get an idea of the enduring brand strength and the huge potential to push more services to steadfast Apple fans.  

Given the huge installed base of iPhones and other iOS gadgets, Apple's services business story is just starting and it is this aspect that really matters when it comes to future growth, goes the narrative.  

In the December quarter, Apple's services revenue grew 19 percent, becoming the standout segment amid an overall poor holiday season showing by the firm. Gross margin in the business rose to 63 percent from 58.3 percent a year ago.

That compares with the firm's overall gross margin of 38 percent for the quarter.

Going forward, the company believes the services segment -- which includes Apple Music, iTunes, App Store, Apple Pay, iCloud and other offerings -- will expand faster and make bigger contribution to revenues, helping offset a slowdown in hardware sales. 

The enormous installed base of the iOS devices and the tendency of Apple users to stick to the ecosystem will allow the company to sell more of its services in the years to come, executives say.  

During the earnings call, Apple boasted about its user numbers, saying that it had 1.4 billion active devices, marking an increase of 100 million during the year. The active installed base for iPhone is more than 900 million, with the company claiming growth of almost 75 million in the last twelve months alone.

Apple plans to periodically provide updates on the iPhone installed base as well as total installed base. 

With more than a billion users using Apple devices, Apple is well placed to push services such as cloud and Apple Music and boost subscription revenues. The company is in the process of boosting its video content, producing original TV shows, which can help drive the streaming business.

And there is also the Apple Pay mobile payment service, which is gaining more users around the world.

The story for Apple is that if services can generate half a dollar a day from each iPhone user, it will generate US$500 million revenue. That means a US$182.5 billion business each year, or a nearly US$46 billion a quarter.

In the December quarter, Apple generated US$10 billion services revenue. It means there is vast potential still out there for the firm to tap the services segment if users remain loyal to the Apple iOS ecosystem.

Right now, Apple is trying to push more services revenue through its own apps. Apple Music is the first app that is testing the water in such model, with more than 50 million users paying for the service. The next potential cash cow could be Apple News services. 

CEO Tim Cook revealed that Apple News readership set a new record with over 85 million monthly active users in the United States, the UK, and Australia. In the US, the latest data from Comscore shows Apple News has the largest audience of all news apps.

Such numbers will provide strong support for Apple to monetize the news app with a reasonable subscription fee. That will allow Apple to support the news industry as well, as it would share revenue with news publishers for distributing their news on the Apple platform.

Among the other services, video streaming, too, has the potential to grow to a much larger scale, thanks to a big push into original programming. 

Apple is spending big bucks and partnering with program hosts and studios to produce original content, setting the stage for a potential faceoff with Netflix and Amazon Prime Video.

The show certainly promises to get bigger, helping the firm's overall goal for the services business.

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EJ Insight writer