Apple looks to services and emerging markets for Q2 positives

With two billion active devices globally, Apple’s services revenue grew, even though its emerging ad business shows some signs of unpredictability, but product sales fell, making the segment’s long-term potential a key topic of Q2.

Why it matters

Apple is changing. It is shifting from a seller of new devices to Western buyers, to a provider of services to a user base whose growth now tracks the emerging middle classes of the global south.

Services

While the maker of the iPhone continues to sell a lot of devices, users are buying them less frequently than they used to, and they are costly to produce, market, and sell. They remain the biggest segment (78%) of the business, but are down 4.8% to just shy of $74bn.

Services, meanwhile, are far more profitable for the company at a whopping 71% margin, according to company results. They don’t require a new device and are easier to upsell to its two-billion-strong active user base. Around half of these users (975m) are now paid subscribers to digital services, which grew by 5.2% year on year in Q2 to reach $20.9 billion.

Services are interesting as they range widely from obvious paid subscription services like Apple Music or Apple TV+, to its cut of App Store fees, Apple Pay, and advertising. While advertising is still small, the company has big ambitions in the area but it is proving to be more sensitive to wider conditions than the rest of its business.

India

The services strategy is key when considering Apple’s pivot to India, where it aims not only to sell lots of new devices – they are expected to grow 31% in the country – but also to increase its foothold in India’s refurbished phone market, which is a key portal into the ecosystem.

• Tim Cook explained that India is “a major focus for us” on an earnings call. In Q2, the business “set a quarterly record”, growing double digits, though the exact figure remains under wraps.
• “There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there.” This is, of course, a long game, with Cook noting that ARPUs in India are much lower than other regions, but the opportunity for growth Is clear.
•  “In places where our market share is low, we tend to add a lot of switchers, people that are new to the Apple ecosystem,” added CFO Luca Maestri. “That increases the install base. And over the longer term, it obviously improves our ability to monetize on services as well.”

Advertising and economic headwind

Apple’s interest in advertising has spooked some of its rivals, while its privacy features have been blamed by social media firms like Meta and Snap for dips in performance. This is playing out at the same time as they endure broader macroeconomic headwinds. Apple, however, is feeling some of this pressure too.

While Apple doesn’t break down the different segments of its services business – where advertising sits – Maestri noted that both advertising and mobile gaming have been affected by the macroeconomic climate.

What’s interesting is the comparison with the other areas of its business, which have remained relatively consistent. For Apple, it’s rare for buyers not to be motivated by its formidable brand in a transaction. But, with an expanding and aspirational install base and more formats than its App Store sponsored listings, this is likely to change.

Sourced from Apple, Seeking Alpha, WARC, MobileDevMemo