As Apple’s flagship gadget underperforms for the first time, the demand for services might be overshadowing product markets; it might be time for the technology pioneer to revamp business models to stay ahead.
Apple finally witnessed a drop in its iPhone sales this quarter, forcing Tim Cook and his crew to realize the changing market trends from hardware to software. Apple, till now, had been comfortably nesting on its perch as the leader in smartphone market with the flagship iPhone accounting to a major share of its earnings, but with recent shifting tech trends, it may be a tough road ahead for a company like Apple which is a brand based mostly on gadgets.
Apple has itself see the emergence of services with its second quarter earnings showing services to be Apple’s second-largest business after the iPhone, shadowing both Mac and iPad. The App Store, iTunes, iCloud, Apple Pay and other services accounted for approximately $6 billion of Apple’s revenue, which was up by 20 percent from FY15.
Although the sheer size of Apple’s iPhone clientele with more than a billion devices among consumers might suggest a lot of scope for Apple to grow in services, it’s still a long way short of rivals. The fact that many Apple loyalists choose apps and services from Google and Microsoft on their iPhones over some of Apple’s default comparable services, suggests that the task at hand is far from easy
Services have the benefit of a continuing revenue stream unlike hardware, but analysts say that Apple faces a mammoth task in carving out the same niche position in services that it has managed to attain for its gadgets. The $6 billion in services is a small sum in comparison to iPhone sales which accounted for about two-thirds of the company’s $50.6 billion quarterly sales. Another reason for expanding its services business is Apple’s decision to release the smaller, much cheaper iPhone SE back in March. The move might be perceived as compensating revenue per device with portfolio extension and thus a broader adoption of its phones.
Another of Apple’s business models that might come into question is its annual update and release model for gadgets. This again falls in front of competitors like Samsung which has an expansive portfolio of gadgets with year-round launches and Google and Facebook which update their services and platforms in real time.
Colin Gillis, analyst with BGC Partners commented, “For the strategy to really make a lot of sense, you want to be more aggressive in building services revenue.” He also highlighted that that margins for Apple’s services businesses are much less when compared to the iPhone.
Apple’s CFO Luca Maestri has earlier said that the services business at Apple achieved a similar level of profitability for the company as the average of its other businesses, but it is unlikely that the services generate the same amount of returns like the iPhone.
There might be a need for Apple to revise its business verticals and give its services business a needed push, but with competition already ahead in the game, gaining a substantial market share would be an arduous job. However with dip in sales making a debut for the iPhone, restructuring in Apple’s way of business is inevitable. Will the expansion of the smartphone portfolio be enough or whether making headway in the services is the answer, the shift in trend from gadgets to services has made its impact known to one of the world’s biggest technology companies.
