Done right, Apple can increase both hardware and services revenue without having a major margin hit. By factoring in these bundled content costs into iPhone and iPad profits and losses, Apple can transform low margin streaming revenue into margin contributors for hardware. Apple could retail super premium editions of iPhones and iPads with lifetime content bundles included. The latest earnings guidance shows that even more is needed. This revenue over volume approach proved its worth.
#IPOD MUSIC RESCUE DRIVER#
Streaming as a margin driver for hardwareĪpple weathered much of the smartphone slowdown in 2018 by selling higher priced devices such as the iPhone X. To be clear, the reason for this is not so much to drive streaming revenue but to drive iPhone and iPad margins and in doing so, not saddle its balance sheet with low streaming margins. Think of it as Apple’s answer to Amazon Prime. But rather than music alone, it would make sense for Apple to execute a multi-content play with music, video, newsand perhaps even monthly App Store credits. I first suggested Apple should do this in 2014. Back then Apple didn’t need to do it.
#IPOD MUSIC RESCUE DOWNLOAD#
CWM was built in the download era but the concept of device lifetime, unlimited music included in the price of the phone works even better in a streaming context. Nokia might just have drawn Apple’s next blueprintĭuring its race to the bottom, Nokia launched the first 100% bundled music handset proposition Comes With Music (CWM). It was way ahead of its time, and now might be the time for Apple to execute another early (well, sort of early) follower move. This means Apple cannot simply build its streaming business as a standalone entity, but instead must integrate it into its core devices business. So it has a quandary: grow streaming revenues to boost services revenue but at a lower margin. Apple’s residual investor value lies in being a premium, high-margin business. However, the problem with both music and video streaming is that neither is a high-margin business. A video service should finally launch this year to drive the charge. With third-party apps driving external billing, Apple needs its own streaming revenue to grow. Apple has benefited doubly by ‘taxing’ third-party services like Spotify and Netflix, while enjoying success with Apple Music. Streaming is booming across both music and video. Streaming will drive revenue but not margin So Apple has to look elsewhere for services revenue. That may only be c.1% of Apple’s services revenue but it is a sizeable dent. Netflix, the App Store’s top grossing app in 2018, recently announced it is phasing out iTunes billing, which is estimated to deliver Apple around a quarter of a billion dollars a year. Added to that, key content services are moving away from iTunes billing to avoid the 15% iTunes transaction fee. But it will not grow fast enough to offset slowing iPhone sales. App Store revenues will continue to grow, even in a saturated smartphone market, as users shift more of their spending to mobile. So, services are already a big part of Apple’s business but the high-margin App Store is the lion’s share of that. Fast forward to Q3 2018 and Apple reported quarterly services revenues of $10 billion-16% of its total quarterly revenue of $62.9 billion. That is where Apple is now, and music and video will be a big part of how Apple squares the circle.Īpple started its shift towards being a services-led business back in Q1 2016, issuing a set of supplemental investor information with detail on its services business and revenue.
But the smartphone market is now mature and in mature markets, market fluctuations need only be small to have dramatic impact. Apple’s disruptive early follower strategy is well documented across all its product lines and the iPhone was a masterclass in this approach. Apple’s touchscreen approach, coupled with a superior user experience and its ability to deliver a vibrant, fully integrated App Store, saw it quickly become the leader in a nascent market. Nokia’s downfall was triggered by a corporate rigidity, with the company unwilling to embrace - among many other things - touchscreens. But it does not indicate Apple is about to do a Nokia and quickly become an also-ran in the smartphone business. This is clearly a big deal, and probably not as much to do with a weakening Chinese economy if Alibaba’s 2018 Singles’ Day annual growth of 23% is anything to go by. By Mark Mulligan of MIDiA and the Music Industry BlogĪpple’s downgraded earnings guidance represents its first profit warning in 10 years.
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