A Closer Look at Apple Services


Apple Inc (AAPL) is a global behemoth. In true tech-industry fashion, Apple has grown by leaps and bounds over the course of last few years and is now the most valuable company in the world. Much has been written about the legendary design and the Apple products – but one segment that does not get a lot of love from investors, although it might turn out to be one of the most important ones in the future – Apple Services segment. As technological revolution in hardware appearing to plateau, some authors and analysts have hinted at Apple looking to turn into a service-based software company rather than the hardware focus that it now remains. This article takes a closer look at Apple Services.

Apple’s Business Segments

The major business segments as of today are listed below. The major reported segments change over time as products rise and fall due to demand.

  • iPhone – Introduced in 2007, iPhone is the flagship product of the company bringing in bulk of the revenues quarter after quarter.
  • iPad – Introduced in 2010, interest has waned after the initial excitement and market saturation. The latest release of a Pro version is expected to give an extra shot of interest going forward.
  • Mac – The first product of the company – the Macintosh computer, still continues to this day as a major segment of the Apple business.
  • Services – The services division includes revenues from iTunes Store, Apple Care, App Store(1), Mac App Store, iBooks Store, Apple Music, Apple Pay, licensing and other service offerings etc.
  • Other Products – This includes Apple TV, Apple Watch, Beats Electronics, iPod(2) and third-party accessories

(1) Until FY2012 (quarter ending Sep 2012), revenue and earnings numbers from each product were included their respective categories. For e.g., iPhone service sales were reported in the iPhone business segment.

(2) Before FY2014 (quarter ending Sep 2014), iPod segment reporting used to be independent, but starting Dec 2014, the segment is included in ‘Other’ category.

A Closer Look at Apple Services

The services sector includes: iTunes Store, Apple Care, App Store(1), Mac App Store, iBooks Store, Apple Music, Apple Pay, licensing and other service offerings etc

Whichever camp you ask, most people will agree on one scale or another that Apple products are sleek and beautiful. Much of the design and effort has gone into making the interface intuitive and easy to use. Users are able to switch between devices seamlessly and the Apple ecosystem is what keeps the users loyal to the platform.

Apple Services has garnered a lot of attention from Apple – and it is apparent that most of the innovation – both from the technological and business point-of-view is turning lately towards software and services as hardware innovation has slowed considerably as the Mac/iPod/iPhone/iPad products mature.

Looking through the quarterly and annual reports, I have pulled the following data from the segment breakdown and charted the growth by segment. The iPhone still plays the biggest role in Apple’s revenue streams, but Apple Services is still seeing double digit growth rates annually.

All data is taken from Apple’s respective quarterly and annual reports.

Quarterly Revenue - raw

Quarterly Rev - raw chart

Viewing the segments as a percentage of total revenue is as follows:

 Quarterly Revenue - PercentageQuarterly Rev - Percentage chart

Not bad, but still it doesnt give us a good visibility as to how the service sector is doing since the quarterly revenues have varying percentage. Looking at the annual figures gives us a better picture.

Annual Revenue - Services

That’s better! As you can see, more has been done over the years in the service sector, but the revenue although growing, has slowed down. Apple has been minting out new products and more importantly – services with those products.

Future growth of the segment looks just as bright – if not brighter. Apple Pay (now that it is being introduced outside US) is expected to be adopted more broadly as everyone including the central banks around the world are pushing for reducing usage of physical cash by the general public. The rumored Apple Car and Apple CarPlay will bring in more customers/developers/users into the ecosystem increasing sales through the Apple App store – thus keeping the Services sector growing. Likewise with the Apple TV and iTunes stores. Apple Care program is now launching a monthly fee so that iPhone users can automatically upgrade each year. The services segment might well play a bigger part in Apple’s future revenue and earnings.


Apple has been releasing more products and services over the years and most media attention remains focused on the products. However, it is the software and the service that binds these devices together and keeps the users engaged and locked into the ecosystem. The future for Apple Services looks bright with new technologies on the horizon and still remains in double digits in growth.

Full Disclosure: Long AAPL. My full list of holdings is available here.

14 thoughts on “A Closer Look at Apple Services

  1. Hi Sabeel!

    “The services segment might well play a bigger part in Apple’s future revenue and earnings.”

    YES! More on that in a moment.

    Hardware profits will decrease over time as markets get saturated and new features offer diminishing returns. Regarding the latter point, 3D Touch is pretty neat, but clearly not as appealing to consumers as the larger screen introduced with the 6. The other problem with Apple products is that they’re very well made, so there is no need to replace products frequently. In my own life, every Apple product I’ve ever owned going back to my iPod (> 10 years old) still works.

    I think very few analysts understand just how critically important services are to the future of Apple. Services like Apple Pay not only make the ecosystem stickier, but provide for an ongoing revenue stream. I can’t wait to see what Apple does with Apple TV and potential streaming deals.

    In that revenue chart, I’d love to see revenues brought in by services comprise at least 50% of the pie within 10 years. That would finally quiet the concerns of the short term analysts.

    • Hi Mr 1500,
      Its what attracted me to Apple in the first place when I first picked up shares…the growing investment (both time and money) in new services. Apple will always make great products and its key to keep the users locked into the ecosystem – but as you said, its going to be smaller margins as time moves on – although I dont think we will see a race to zero there as its a premium brand and users are willing to pay for it. The services sector on the other hand is a high margin business and I, like you, would like to see a bigger share of the services sector in the next decade.
      The analysts always tend to look at the short term and forecast insanely tbh. Apple is a fantastically run company and I find it almost hard to believe that its trading at a Forward PE of 11. That is dirt cheap imo and I would be happy o buy more here for the long term. I am just waiting for some cash to accumulate in that account before making more purchases.

      Thanks for stopping by and sharing your thoughts

  2. Nice write up buddy. Apple has a super sticky ecosystem….and a nearly cult following. I always felt the company was too dependent on the “next big product”. Turns out I was wrong….and the $100s I made swing trading the stock would have been $100,000s if I had just believed in Steve and his company’s ability to innovate. Consider this my mea culpa buddy!

    In spite of that experience, and the quality products, I’m not a buyer today either. What can I say……some guys never learn 🙂

    • I had stayed away from Apple for the longest time and never tried to trade….and always watched from the sidelines watching it grow from leaps and bounds. The start of dividend and more importantly dividend growing finally was the cue for me to jump in. Im hoping to see Apple’s business model change over the coming years as they add more to their product and service line. It’ll be interesting to see where they take things.

      Glad you liked the article – thanks for stopping by and commenting. Hope things are well on your end

  3. Appreciate the in depth overview. I too am long on AAPL even though there are some declines in growth with the hardware unit. The cash on hand and recent history of rewarding shareholders are some of the large intangibles that keep me invested. Thanks again!

    • Good to hear from you, WID. The company is making $50B rev/quarter and just made $52B ($1B/week) in earnings in 2015…those are some staggering numbers and its hard to not stay invested. Its a cash making machine and investors are well rewarded for staying invested.


  4. Steyoun says:

    Nice article I appreciate someone talking about something other than iPhone sales. I have been interested in the category for a couple years now, especially on the bottom line impact. The reason the services has a bigger bottom line impact than top line impact is the “Agency Model” of reporting net sales for the App stores. That is they only report the 30% sales commission as net sales. This means that accept for the cost of administration i.e. hosting, billing etc the App store revenues go straight thru to the bottom line. This should mean the gross margins are much higher for App store revenue then the hardware Apple sells. If we also consider other Services revenue as have similar margin like Apple Care, Apple Pay then what would be the margins for the entire $20B/yr Services category? Perhaps the margins could be a follow up article? Cheers!

    • Hey Steyoun,
      Glad you liked the data presented and the article. I agree that its annoying to see almost all articles mainly focus on iPhone numbers and other categories not really getting any love. Its a segment that interests me a lot and what attracted me to Apple in the first place as an investment – and figured that it would be good to take a closer look at it.
      I agree with your take on it – that the margins are probably higher when broken down and looking straight at the App store rev and earnings. Thanks for the idea – I will have to take a look at the quarterly and annual reports and pull those numbers out.


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