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What is Apple’s Latest Printing Press?

Let’s go back in time for a moment. It’s September 2017, and I’m feeling a familiar kind of excitement.

Not for my birthday, not for a vacation, but for something far more sacred to my inner geek: Apple Keynote Day.

Even though most Apple Keynotes were a big deal back then, this one in particular was a standout. 

They started off with the iPhone 8. A solid, expected upgrade. You know, new camera, faster chip - you know the drill. But then Tim Cook said - “But we have one more thing …”

He then revealed the iPhone X. No home button, edge-to-edge display, Face ID instead of Touch ID. It was magical. 

Fast forward to today, Apple’s Keynotes just aren’t the same spectacle they used to be. Don’t get me wrong, the new iPhones are still some of the best pieces of technology you can get your hands on.

But that electric, “OMG, shut up and take my money!” excitement isn’t there anymore.

However, one thing that has been really interesting these past few years? The price.

Although the eggs at Whole Foods have gotten more expensive every passing year, the iPhone Pro models have been priced at $999 for a while now.

If you think about it, that’s crazy. The iPhone being sold at the same price over the years means it is technically getting cheaper. 

How? Say hello to JPow’s best friend - Inflation. 

Apple, surprisingly, has declined to raise the price of the iPhone Pro, even in the face of one of the worst inflation rates in a generation. Adjusted for inflation, the iPhone Pro today actually costs about $177 less than it did in 2020. 

And that’s not the only thing that stands out. Apple’s iPhone lineup is now broader than ever, with something for everyone at every price point. 

• Want to go all-in on the latest Pro Max?

• Eyeing the iPhone SE to save some cash? 

Apple’s got you covered.

This begs the question: What’s really happening here?

Why would Apple, the king of premium pricing, keep the iPhone price steady and even expand the lineup to include cheaper models? Especially when the iPhone has been their golden goose for over a decade.

Well, it’s because the game has changed. 

The Rise of Apple Services

See that one revenue stream that has been growing at an astoundingly fast pace? 

That revenue stream, my friends, is Apple’s latest cash cow: Apple Services. 

Before I dive into some numbers, let’s first define what all is encompassed by the Services sector, because it’s more than you think. When Apple talks about its services, they love to spotlight the glamorous stuff like Apple TV+ and Apple Music. 

However, the real money in Services isn’t in Hollywood glitz. It’s in the less sexy, but incredibly lucrative parts of the business:

1. App Store Revenue Commissions

2. Google’s Search Engine Payments

3. Apple Pay Transaction Fees

4. Apple Care, iCloud and Apple One

Even if a quarter of the services revenue comes just from Google payments, and another chunk is Apple taking its cut from App Store transactions, there’s still a lot more going on here.

Apple is building an enormous business that’s based on Apple customers giving the company their credit cards and charging them regularly. And that business is INCREDIBLY PROFITABLE.

Numbers Don’t Lie

Most people still think of Apple as a products company - after all, hardware is what made them famous. The intersection of hardware and software has been Apple’s home address since the 1970’s. And yet, a few years ago, Apple updated its marketing language and began to refer to Apple’s secret sauce as the combination of “hardware, software and services”.

For years now, Apple has been pointing out that it expects explosive growth from Services and it hasn’t been wrong. Just take a look at the numbers from the most recent quarter.

Apple services made more money than the Mac, the iPad, AirPods and the Apple Watch combined - which brought in about $22.3 billion. 

Only the iPhone is more important to Apple’s top line where revenues stood at $39.3 billion.

But what about the bottom line? While the hardware product line far exceeds the Services revenue, the latter boasts an impressive gross margin of 75% - more than double that of products where gross margin sits at around 35%. 

Here’s a chart to understand the implications of product and services on Apple’s bottom line.

Last quarter, Apple made about $22 billion in profit from Products and $18 billion in profit from Services. It’s the closest those two lines have ever come to each other. And it is not a matter of if but of when will the Services profit take over Product profit and possibly never look back again. 

So is Apple a services company now instead of a products company? 

The Services Strategy

The underlying nature of hardware is that as it matures, it becomes harder to stand out and it starts feeling like a commodity. As smartphone devices hit peak innovation, it’s getting harder for Apple to wow us with must-have upgrades every year.

Whenever a new iPhone comes now, it’s starting to feel a bit like, “Yeah, OK, it’s a little faster, better camera, do I really need this upgrade”?

Don’t get me wrong, the iPhone is still incredible. It’s the biggest revenue-generating product to be made ever - generating almost $1.8 trillion in lifetime sales! That’s no small-boy stuff.

But the smartphone and the iPhone market isn’t growing like it used to, which means Apple has to find new ways to keep the cash flowing. 

Cue Services.

Remember how I talked about Apple effectively lowering iPhone prices and offering more iPhones at different price points? 

Well, that’s because Apple isn’t just a products company anymore -  their focus is now on expanding the user base, even if it means slimmer margins on hardware. 

Apple now wants more and more people in the door. It’s trying to increase the iPhone’s addressable market by having a bigger buffet of options to get as many people into The Ecosystem. 

Because Apple knows that the buck doesn't stop once you’ve bought the hardware. You buy an iPhone, then you pay for iCloud, maybe Apple Music, and just like that, Apple’s making more money from you.

And it’s the kind of revenue that makes investors weak in the knees:

1. Recurring

2. Extremely high-margin

If you step back and think about it for a moment, it makes perfect sense. Apple doesn’t care which iPhone you have for using their services, as long as you have one. 

The nature of services is such that it doesn’t care much about the underlying hardware it is running on. 

I have the iPhone 13 Pro and my wife has the iPhone 15 Pro Max. Despite her phone being $200 more expensive than mine, we both pay the same amount for iCloud storage.

My AllTrails Pro subscription - which I purchased so enthusiastically the start of the summer (I went on exactly 1 hike this summer) will not get cheaper/expensive if I downgrade/upgrade my phone.

So based on this, should you slap anyone right in their face when they tell you that Apple is a product company and correct them by saying Apple is now a SaaS company? 

Well, obviously no - both to the slapping and the hypothesis. All Apple services by and large depend on you having an Apple product that unlocks them.

Without these devices, The Ecosystem itself is not present to monetize. But until Apple doesn’t come out with its next breakthrough hardware device (NOT looking at you Vision Pro), the role of hardware is subtly shifting. 

Devices now act as the gateway to Services. 

Apple doesn’t need to squeeze every last dollar out of the iPhone now because it knows that the real money comes later.

❓ Trivia ❓

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