As iPhone Sales Peak, Apple’s Pivot to Services Has 2 Major Problems

Revenues from services have long been touted as the key driver of growth for Apple as iPhone sales slow.
Apple iPhone China
Apple is trying to diversify its revenue away from the flagship iPhone, but that's easier said than done. | Image: GREG BAKER / AFP
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  • The share of Apple’s revenues coming from iPhone sales has been falling over the last two years.
  • Services revenues have been plugging the gap, but challenges are beginning to emerge.
  • Several tech giants have voiced their opposition to Apple’s dominance and especially App Store policies.

Apple’s (NASDAQ:AAPL) dependence on iPhone sales has been declining since 2017.

In the first quarter of fiscal 2018 (Apple’s Q1 begins in September), iPhone sales comprised 69.74% of the tech giant’s total revenues. In the most recent reported quarter, iPhone sales constituted 44.3% of total revenues.

Apple
Apple’s services revenues have been growing consistently. Is the music about to stop? | Source: Statista

iPhone revenues hit a peak of $61.6 billion in Q1 2018. In Q1 2019–a quarter that coincides with Apple releasing new smartphones–the tech giant recorded $55.95 billion in iPhone sales. In the most recently reported quarter, Apple generated $26.42 billion from the flagship smartphone.

Meanwhile, revenue from services has grown from $4.4 billion in Q1 2014 to $13.16 billion in the most recent quarter.

In Q1 2018, Apple’s services revenues constituted just 9.59% of the total. The services component now comprises more than a fifth of total sales.

As the iPhone’s share of total revenues falls, the services component has been viewed as Apple’s savior. Recent developments are putting this at risk, though.

Apple’s Services Revenues Now at Risk

Just this week, Epic Games filed a lawsuit against Apple, alleging monopolistic practices on its App Store, a significant contributor to the tech giant’s services revenues.

The actions of the Fortnite maker have received support from companies like Facebook (NASDAQ:FB), Spotify (NYSE:SPOT), and Tinder parent Match Group (NASDAQ:MTCH). The common complaint is that Apple is abusing its dominant position to force unfair policies that hurt developers and consumers.

Coming at a time when Apple is facing scrutiny in the U.S. and Europe over alleged anti-competitive behavior, this should be worrying for the tech giant. In response, Apple has argued that it competes fairly.

VIDEO: Boot’s on the other foot! Epic Games parodies a decades-old commercial that Apple used to fight IBM dominance in the PC market.

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The Threat of Antitrust Investigations

Last month, Apple CEO Tim Cook told the House Antitrust Subcommittee that the fees it charges developers of paid and subscription apps on the App Store are not exorbitant. The iPhone maker levies a 30% cut on paid apps, in-app purchases, mobile games, and some subscriptions.

The problem, though, is that developers have little choice but to bend to the App Store policies. This is what has led Epic Games to sue.

Unfortunately for Apple, the App Store has grown too colossal revenue-wise to ignore. In 2019, the platform recorded about $50 billion in gross sales. If the App Store were an independent firm, it would rank 64th on the Fortune 500 companies.

App Store
Annual App Store revenues are too significant to ignore. | Source: @CNBCtech/Twitter

As antitrust investigations continue and pressure from developers piles on, Apple could find itself in an unfortunate position. Regulations could be put in place to reduce its dominance. Or the iPhone maker may try to forestall that by lowering its fees.

Whatever decisions are made regarding the App Store, Apple’s service revenues will likely take a hit as a result.

Apple TV+ Not a Hit

The brewing storm over the App Store isn’t the only threat to Apple’s services revenues, though. Some Apple services are also struggling at a critical time.

More than half a year after launching, Apple TV+ has disappointed. Between November 2019 and June, the percentage of American households that subscribed to the service grew from 4% to 7%.

Epic Games
Apple’s video streaming service has bombed. | Source: @slideme/Twitter

The performance is even worse when you consider that ever Apple device purchase comes with a 12-month trial of the streaming service.

Meanwhile, 28% of American households had subscribed to Disney+ over the same period. The streaming service owned by Walt Disney (NYSE:DIS) launched in November too.

Due to the slow growth of Apple TV+, Apple is planning to package several of its subscription services as a bundle at a lower price.

With all these challenges, Apple will find it difficult to diversify its revenue streams away from the iPhone, at least for the next few years.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.

Sam Bourgi edited this article for CCN - Capital & Celeb News. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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