If you ask Apple CEO Tim Cook what aspect of Apple’s business investors should be paying more attention to, it’s Apple’s services business.
Apple’s services business, comprised mainly of Apple’s App Store and subscriptions like Apple Music and iCloud, is now the second-largest line on Apple’s income statement with quarterly revenue of $7.3 billion, after the iPhone.
“Over the last 12 months, our Services business has become the size of a Fortune 100 company, a milestone we’ve reached even sooner than we had expected,” Cook said during Apple’s earnings conference call earlier this week.
As a sign of how much services means to Apple, the company added a line about it to its official business strategy included in an SEC filing on Wednesday.
“The Company believes ongoing investment in research and development (“R&D”), marketing and advertising is critical to the development and sale of innovative products, services and technologies,” Apple wrote in the filing.
Previously, the word “services” was not included in that sentence.
Apple’s description of its business strategy does not change drastically from quarter-to-quarter. Apple’s description has stayed largely the same since 2014, with minor updates, mostly to the names of products.
Apple also added a mention of services to an paragraph about Apple’s research and development expenses in the same filing.
“The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to the Company’s core business strategy,” Apple wrote in the filing.
Apple’s services business, largely driven by the 30% cut Apple takes when people buy apps and in-app purchases from its App Store, is seen as critical for the company as iPhone sales growth has slowed in recent years. People are hanging onto their iPhones for longer, and there isn’t as much room to expand as there was a few years ago.
So, services represents a critical opportunity for Apple to make more money from its existing base of customers.
Widely-followed technology analyst Ben Thompson wrote on Thursday that it appeared as if Apple’s attempts to lock its customers into its own services was “steadily increasing.”
Indeed, Apple’s attempt at services lock-in is steadily increasing: HomePod supports only Apple Music and Siri, CarPlay supports only Siri and Apple Maps, iOS still doesn’t let one change default applications. None of these decisions are based on delivering a superior experience, the key to Apple’s differentiation with a hardware-based business model; all are based on securing an ongoing relationship with the company that can be monetized over time.
But Apple’s new insistence that R&D spending include services suggests the company knows it needs to deliver new services that are worth paying for — perhaps, something like the internet-TV subscription it’s been rumored to be considering for years.
Or, Apple could also introduce new products under the iCloud banner beyond cloud storage — perhaps something dealing with security and identity, or something else that takes advantage of Apple’s tight integration of software and hardware — something Cook says only Apple can do.
Regardless of what happens with Apple’s services, investing in it through research and development and advertising is now part of Apple’s official business strategy.