★ Apple’s Profits From Services Are on the Cusp of Surpassing Its Profits From Device Sales
Apple’s success with services is no more a distraction from their core business than their success with their own chain of retail stores has been.
Jason Snell, “Existential Thoughts About Apple’s Reliance on Services Revenue”:
The intersection of hardware and software has been Apple’s home
address since the 1970s. 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.” […]
Last quarter, Apple made about $22 billion in profit from products
and $18 billion from Services. It’s the closest those two lines
have ever come to each other.
This is what was buzzing in the back of my head as I was going
over all the numbers on Thursday. We’re not quite there yet, but
it’s hard to imagine that there won’t be a quarter in the next
year or so in which Apple reports more total profit on Services
than on products.
When that happens, is Apple still a products company? Or has it
crossed some invisible line?
What a great column from Snell. One way to look at it — as Snell points out in the first paragraph quoted above — is that Apple has always been a two-sided coin. They are the company that best exemplifies Alan Kay’s adage: “People who are really serious about software should make their own hardware.” Apple has always been like one of those optical illusions that looks like one thing at first, but looks like another if you stare at it for a few seconds. A hardware company that makes great software. A software company that makes great hardware.
Coins only have two sides though. If services constitute a new third dimension for the company, and we carry this analogy through, it’s like a coin whose edge just keeps getting thicker. If the edge gets thick enough, it’s no longer a coin — it’s something else. A stick or a baton.
But another way to look at it is that services are just another form of software. Software that runs not on the personal computing devices Apple sells to customers, but which run on servers in the cloud. And, importantly, is sold to users via lucrative recurring subscriptions. Content often isn’t what we think of as software (like say music, movies, and TV shows) but content from the App Store is. But the key is that it’s all stuff that the users of Apple’s devices consume on those devices. Apple’s core business is designing, engineering, producing, and selling those devices. Services are just a huge, and growing, part of what users do and consume on those devices.
To extend Kay’s axiom for today’s world, I suspect Apple’s leadership sees things this way: People who are really serious about device platforms should make their own services. Viewed that way, Apple’s success with services is no more a distraction from their core business than their success with their own chain of retail stores has been. It’s just a necessary evolution.