Apr 28, 2016

    Can Apple tap on services to cushion iPhone blow?


    APPLE'S first-ever drop in quarterly iPhone sales has spurred chief executive Tim Cook to turn the spotlight on prospects for its service business. But the field is rife with competition and may prove challenging for a brand based on gadgets.

    Second-quarter earnings saw services emerge as Apple's second-largest business after the iPhone for the first time, topping iPad and Mac sales which both fell.

    The App Store, Apple Music, storage centre iCloud, mobile wallet Apple Pay and other services generated nearly US$6 billion (S$8.1 billion) in revenue, up 20 per cent from the previous year.

    And executives have cheered the progress they are making in subscriptions, touting Apple Music's 13 million paying subscribers.

    The size of Apple's installed base with one billion devices in consumer hands suggests it has plenty of room to grow in services.

    Services also promise a recurring revenue stream, unlike hardware sales. But analysts say Apple faces an uphill battle in carving out the same sort of position in services that it has achieved with its hardware.

    The US$6 billion in services revenue also pales in comparison with iPhone sales, which accounted for about two-thirds of the company's US$50.6 billion quarterly sales.

    Firms, such as music service provider Spotify, cloud storage rivals Google and Microsoft as well as map makers, have claimed major audiences among the iPhone users, even when Apple has offered its own products as a default.

    Also raising the stakes for its services business has been Apple's decision to release last month the smaller, much cheaper iPhone SE - a move that is seen as trading revenue per device for broader adoption of its phones.

    "Apple has settled into this annual upgrade cycle for hardware and software," said analyst Jan Dawson at Jackdaw Research.

    "That's quite different than the way that, say, Facebook pushes out updates to its app or Google makes changes to its search engine - they do that almost in real time."

    Colin Gillis, an analyst at BGC Partners, calculates that margins for Apple's service businesses are not as strong as the iPhone.

    Pushing ahead in services in China - Apple's second largest market - may also be challenging due to regulatory concerns.