You might think of Apple as a company that makes its money off of physical products such as Macs and iPhones. You might think that, and to some extent you'd be right. But, in many ways, you'd be wrong.

Apple recently unveiled some news that may be surprising to some: in the past quarter, revenue of its services division (including Apple Music, Apple Pay, AppleCare, the App Store, iTunes Store, iCloud, licensing, among other services) jumped 34 percent year over year. That kind of growth would be impressive for a smaller company, but for a behemoth like Apple, that means their services now stand at $8.5 billion a quarter.

To put that in perspective, that's more than the combined revenue contribution of Apple's iPad and "other products" division, the latter consisting of AirPods, Apple Watch, Apple TV, iPod Touch, and Beats. Another way to put it: Apple's services division is so powerful that as of earlier this year it could be spun off on its own into a Fortune 100 company.

Of course, services has been big for Apple for some time now. In fact, the service division first surpassed Mac sales back in April 2016, making it the biggest source of revenue for the company besides iPhones.

The secret behind all that growth in services? Subscriptions is a large part. Across all of Apple's services, it now has 210 million paid subscriptions, up 25 million in just this quarter alone. Apple Music plays a major role in Apple's transformation, with the company indicating that subscribers grew 75 percent year over year. iCloud is a big part of services, too, as it experienced double-digit growth in both revenue as well as monthly average users.

Of course, it's not  just newer services like Apple Music that are contributing to growth. The App Store saw not only more downloads, but more time spent within the store as a result of its recent redesign, which rolled out over the past quarter. Part of the App Store's growth have been simple tweaks: splitting Apps and Games into two different tabs, for instance, as well as adding a new "Today" section to allow users to better get a sense of the broad swath

Apple CFO Luca Maestri cites App Annie estimates that suggest App Store revenues may even nearly double that coming from Google Play Store.

Another major contributor to Apple's growth in services? Apple Pay has been expanding all over the world, most recently debuting in Sweden, Denmark, Finland, and the UAE over the past month alone. And while Apple Pay rollouts are occurring abroad, plenty of Apple Pay expansions are occurring in the US. One notable one is Safeway, with a plan in place to support all 900+ stateside locations. Annual transactions with Apple Pay are up 330 percent and, by the end of 2017, over 5 million US retail locations will accept the payment solution.

There's a lesson in all of this: never rest on your laurels. Apple had a highly profitable business model, but it has been selling hardware and peripherals that aren't inexpensive to manufacture. Services, of course, have a different economic model: the cost of supporting each incremental services user goes down, so profitability per user goes up. By making something of a pivot towards services, Apple is in an even better position than before.

Published on: Nov 15, 2017
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