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Apple Music and Pay are quietly preparing Apple for the end of the iPhone

July 31st, 2018 at 5:52 PM
Apple Music, services revenue Q3 2018

Apple just reported its third-quarter fiscal earnings, and as we’re used to seeing from the world’s most valuable company, it was another excellent three months. Revenue and earnings per share were both up (and over analyst expectations), and stocks have seen a modest bounce as investors jump back on the hype train.

But on second glance, Apple’s numbers tell an interesting story. iPhone sales were barely up compared to the same quarter last year, and at 41.3 million units sold, the analyst expectation of 41.79 million units was actually missed. No one seems to care about that, because the average selling price of the iPhone rose significantly (all thanks to the iPhone X), so the money-printing machine is still roaring ahead as usual.

However, stagnant iPhone sales are becoming an increasingly common story. The smartphone market globally is saturated, and with no big breakthroughs coming every year, people are holding onto devices for longer and longer. In order to stay dominant at the top of the market, Apple has to find another mechanism to feed its shareholders the profit they demand.

Luckily, a long-underappreciated Apple division is coming to the fore: Services. Tim Cook spent an unusual amount of time focused on Apple’s services division during the Q3 earnings call, and for good reason. Revenue from Services was up to $9.54 billion, an increase of 31% year-over-year. At nearly $10 billion (let’s just round for convenience), Services is making up nearly 20% of Apple’s $53.3 billion in total revenue. Of course, the iPhone still pulled down nearly $30 billion in total revenue, but Services has rapidly grown from a minor segment of Apple’s business to a major component.

Even more impressive than the revenue figures is the overall growth, and Apple’s place in the market. Cook said that Apple Music has grown 50% year-on-year, which corroborates previous reports that Apple Music is now the biggest streaming service in the US. Then there’s Apple Pay: Cook said that in Q3 2018, there were over a billion Apple Pay transactions, which Cook claimed is more than Square. In mobile transactions, Cook said that there were more mobile Apple Pay transactions that mobile PayPal transactions, although it’s not clear where Venmo (owned by PayPal) is in that comparison.

Either way, the picture is clear: Apple’s services are growing faster than ever, and it’s going to keep going that way. Cook said on the call that “we couldn’t be more excited about the products and services in our pipeline,” which sounds suspiciously like a tease of a long-awaited Apple streaming TV service.

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