On July 30, according to the Wall Street Journal, data from the well-known research firm IDC showed that Apple will sell the same number of iPhones in 2024 as in 2015. However, during this period, Apple’s stock price has increased eightfold, with a market value of US$3 trillion.
Apple's services business is hugely profitable
One of the reasons why Apple's stock price can continue to rise is the various services Apple sells to users in its ecosystem, which cover all aspects of people's daily digital lives.
Lucrative service business
Since 2015, Apple's service business revenue, including iCloud storage and other subscription services, paid apps and in-app advertising, and web search-related revenue, has increased fourfold overall, while device revenue has grown less than 40% during the same period.
According to Bank of America estimates, the gross profit margin of these service businesses exceeds 70%, which is much higher than that of hardware. The gross profit margin of hardware products is approximately between 30% and 40%. This means that Apple's services business has a greater impact on profits than on revenue.
The proportion of Apple services business and hardware in revenue and profit
Wamsi Mohan, an analyst at Bank of America, believes that Apple's decision to separate the fast-growing and profitable services business segment in its financial report is one reason why investors have begun to give Apple stock a higher price-to-earnings ratio.
Crisis lurks
However, after experiencing huge growth during the epidemic, Apple's services business has begun to slow down, and two potential risks are looming that could weaken or even completely destroy key parts of the business.
1.App Store commission
A core component of Apple's services business is revenue from the App Store. Bank of America estimates that the App Store contributed nearly one-third of total services revenue in the fiscal year ended last September.
Some developers believe that Apple's commission fees are too high, so they have complained to regulatory agencies or directly sued Apple through legal means, asking it to change the current App Store charging model. A California judge has ruled that Apple must allow developers to sell iPhone services through its official website. In this case, Apple will not be able to collect any fees from these transactions.
App Store's share of services revenue
In the worst-case scenario, Bank of America estimates that Apple could lose as much as 10% of its net profit. But that would require all major developers to completely move their in-app purchases out of the App Store, which is highly unlikely and Apple is appealing the ruling in the United States.
In the European Union, the Digital Markets Act also requires Apple to make similar changes, allowing developers to bypass the Apple Pay system and avoid its commission fees. Some experts worry that other countries may follow the lead of the European Union and the United States and impose broader regulatory pressure on Apple's service model.
An Apple spokesman said the company disagreed with the California judge's ruling. In addition, Apple also appealed the European Commission's ruling on the grounds that the changes mandated by the agency went beyond the provisions of the law itself, and Apple believed that these changes were detrimental to users.
2. Google search revenue
Another important and lucrative component of Apple's services business is the fee Google pays to become the default search engine for Apple's Safari browser.
Google search payments as a share of service revenue
According to Bank of America estimates, this revenue accounted for approximately 6% of Apple's overall revenue in the 12 months ending in March this year. Since there are basically no related costs, this part of the revenue can be almost completely converted into profits, accounting for 19% of Apple's total operating profits, nearly one-fifth.
After the U.S. Department of Justice won its monopoly case against Google, it asked a judge to cancel the search engine contract between Google and Apple. A judge is still considering the matter.
Google payments as a share of Apple revenue and profit
During the trial, the judge asked Eddy Cue, an Apple executive in charge of services, how Apple would respond if he canceled the contract. Cue replied: "I've been tossing and turning over this."
In addition, advertising revenue is also a major source of Apple service revenue, especially from app advertising in the App Store. Subscription revenue from iCloud storage, Apple Music, Apple TV and other services further increased Apple’s services business revenue.
Advertising and subscriptions as a share of services revenue
Analysts said that although Apple's performance in many services business areas other than the App Store and Google search exceeded expectations, it will still face a difficult challenge to make up for the loss of these two major revenue sources.