Apple Is Now Playing A Whole New Game

Besides delivering a record June quarter, Apple, Inc. AAPL gave us a puzzle to solve by recently releasing its second "budget" phone. iPhone SE is significantly less expensive than its first iPhone. So why is the most premium tech product maker all of a sudden selling itself short? Many would perceive this as an alarm as lowering prices is often a desperate move to deal with intense competition. But in Apple's case, its investors have nothing to worry about. Apple is entering a new era where its iPhone profits won't matter anymore.  Its main cash cow will no longer be under the spotlight, but don't worry – the iPhone is still crucial to its new strategy.

The iPhone opened many new doors

The iPhone is perhaps the most successful product in history. Since Steve Jobs' enchanting reveal, this device alone used to generate more than half of Apple's total sales. But the iPhone is so much more than Apple's biggest cash cow. It enabled Apple to get in the hands of more than a billion people. Just like a chess expert who is planning several moves ahead, Apple is using cheaper phones to seize what its CEO, Tim Cook, calls the "mother of all opportunities."

The growth of Apple's active devices all across the world has been nothing short of extraordinary. Largely thanks to the iPhone, Apple now has 1.5 billion active devices. Over half a billion devices, which also include its MacBooks and Apple Watches, were added in the last few years. This means that today, one in seven people around the globe have an Apple device that accompanies them in their everyday life.

Those 1.5 billion active devices and their owners are the most important driver of Apple's revenue. They are much more important than iPhone sales because Apple is earning money from them. Moreover, as the company is switching from a hardware-based to a service-based business model, the potential for profit is increasing with every passing day. Apple has gone a long way since its products made most of its profits with services only contributing just 15% three years ago. Today, services bring in more than half of Apple's total gross profits. Most importantly, Apple has barely even dipped its toes in this industry.

A transition to a service-based model

Believe it or not, Apple makes a ton of money outside the Apple store through a myriad of services connected to its devices.

Apple Pay and Apple Store

Every time we make a purchase using an iPhone, Apple gets its cut. Whether we use Apple Pay or buy an app from the App Store, Apple wins its share. Then, there's the waterfall of subscription services that Apple ‘offers' to iPhone holders.

Apple Care

Apple sells a rather expensive warranty and insurance service which amounts to about one-fifth of the selling price of the device. Then there's the iCloud cloud service and the magazine subscription service, Apple News, etc.

Apple Music

Since Apple launched its music streaming service in 2015, its subscriber base grew to 68 million subscribers. In 2019, it was the world's second biggest music streamer, right after Spotify Technology S.A. SPOT.

Streaming

Last year, Apple joined the streaming wars by launching Apple TV+. Although it hasn't revealed the number of subscriptions, sources estimate that it is between 10-30 million.

Licensing

Licensing is the least visible, yet very lucrative, side of Apple's services business. For example, Alphabet, Inc. GOOG pays Apple a massive amount of $7 billion a year just to be the default search engine on iPhones.

There are many smaller services that might seem to be behind the scenes. But, each and every one of them is bringing in significant revenue. That is how Apple now earns more from its services than it does from iPhone sales.

Enterprise services are ‘the mother of all opportunities'

Apple has now set its sights much higher as it gets businesses to use its devices and consequently, its services. It has already headed to take a bite of enterprise services. Last month, it bought Fleetsmith, a software company that helps businesses deploy and track Apple devices across workplaces. Only a few weeks ago, Apple also bought Mobeewave which will allow Apple to enter the point-of-sale terminal industry. Mobeewave's technology can transform iPhones into mobile payment terminals and enable Apple to grab a piece of a $69 billion pie.

The end of Apple as we know it – the beginning of a new growth story

iPhone is no longer Apple's biggest moneymaker. Its services are and they come with seemingly endless opportunities. iPhone prices are now irrelevant. The goal is to put as many iPhones as possible in people's hands. By doing so at all costs, there will be a greater number of service users. It is the end of Apple as we know it—but in a good way. The fact that Apple's revenues and earnings rose 11 and 18 percent, respectively, during not only unprecedented times but the worst period of the pandemic, shows Apple has the ability to innovate and execute. Apple's sales from services skyrocketed to an all-time record during its latest quarter. But with its push into enterprise services, it seems its new growth story has just started.

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