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Hear the word “apple” and the first thing to come to your mind is probably the iPhone. This association makes sense if you consider the chart below, showing the composition of Apple’s revenue over the last 7 years. The 2019 breakdown reflects the company’s most recent results – showing that the iPhone still accounts for the lion’s share at ~60% of revenue.

Apple

However, iPhone sales growth (see chart below) has actually been declining since 2010. From then until 2016, when for the first time, Apple sold fewer units than the previous year. Two factors can explain the downward trend.

Apple

The first impacts the whole industry – consumers are upgrading less often because of smaller product improvements. Consider that in 2007, Apple launched the iPhone for the first time.

It amazed consumers, doing away with the keyboard of the day and replacing it with a large, futuristic touch screen in the palm of your hands. Comparatively, upgrades these days are generally underwhelming.

The second contributing factor relates to Apple losing some market share. Notably, Huawei has been particularly strong in gaining traction with their offering of more affordable smartphones.

Apple

Watching its numbers over the last couple of years, Apple’s way of futureproofing is to now increase its services revenue relative to its other products. The recent launch event highlighted how they plan on achieving this.

The event saw Apple announce its News Plus service, which will start at ~R144 per month and give subscribers access to over 300 newspapers and magazines. The company is betting that consumers will rather purchase a single subscription allowing them access to a variety of media than pay for a number of different subscriptions.

Next, Apple TV+ threw its hat in the ring with the announcement that it’ll be hosting its own original content, joining the video streaming market. It enters into a heavily contested space, but keep in mind that in North America, online video streaming has only penetrated 40% of the population. So, there’s room for more players.

The difficulty in creating original content is the cash it soaks up. Fortunately, Apple churns out cash through hardware sales that it can use for content creation for its new platform, Apple TV+. This explains how the company afforded content deals with Oprah, Steven Spielberg, Jennifer Aniston, Reese Witherspoon, Steve Carell, J.J. Abrams and Sesame Street’s Big Bird.

Apple Arcade has also been launched – a gaming subscription service that will allow users to play games across all Apple devices. Another way to lock consumers into recurring purchases.

Finally, there’s Apple Card – a credit card accompanied by an intuitive app that gives you insights into your spending behaviour and helps you manage your repayments. In line with the recent shift in the banking industry, the account will have no fees but will earn Apple revenue from the vendors where the card is used.

Given the fact that ~900 million people globally have an iPhone, the company already has a scaled platform to launch its services onto.

Time will tell how successful the transition will be as they go head-to-head in the competition for service revenue. Based on the stock price since the announcements, the market seems unconvinced for now.

Dhanyal Davidson is the founder of Digest, a daily newsletter that helps readers stay on top of the world of finance and economics in SA. Sign-up is free and they only send one short email each weekday morning – a great addition to breakfast.

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