Services have become an increasingly large part of Apple’s (NASDAQ: AAPL) business over the years. With an increased focus on the segment, Apple recently expanded it to include music, video, games, fitness and financial services along with its App Store, AppleCare and iCloud products. Last year, the company generated $ 53.8 billion in revenue with an average gross margin twice as high as its hardware business.
Apple will continue to look for ways to expand its services business in 2021. Here are three areas the company could explore.
Apple’s default podcast app is still the most popular way to listen to podcasts. But Spotify (NYSE: SPOT) is gaining ground on Apple, stealing listeners and signing top-tier podcast creators for exclusive deals. Spotify previously said its podcast strategy is leading to greater conversion from free listeners to paid listeners. Analysts recently questioned this thesis, and Spotify’s change in relationship last year (by allocating the costs of podcast content to the ad-supported segment) suggests it may only impact free listening.
Apple is reportedly planning to launch a podcast subscription product this year, according to tech news site The information.
It’s hard to see Apple being very successful in launching premium podcasts as a standalone service. Spotify is reportedly exploring that idea, but it hasn’t launched a podcast-only product. In fact, podcasts are more of a complementary service that could fit a couple of other Apple services.
Apple could add exclusive podcasts to Apple Music in the same way Spotify offers them. This could help keep subscribers and keep them from testing the waters with Spotify.
Additionally, podcasts could work to reinforce Apple News. Some sources in Apple News allow you to listen to stories instead of reading them. Podcasts could be a further extension of the service.
New financial services
Apple already offers a handful of financial services that focus primarily on payments. 2021 could see the company expand its services to include those found in other digital wallet apps like Square’s Cash app (NYSE: SQ).
Apple could also add investment accounts such as those found in Cash App or Robinhood. Analysts at Loup Ventures points out that the Stocks app “is already a go-to app for many investors and the company could do more.” They also suggest Apple may offer robo-advisory services such as Wealthfront.
While Apple could generate revenue directly from brokerage services, the real value would come from attracting more users to its financial services ecosystem. Square says it generates three to four times the gross profit of Cash App users who use multiple services in the app. So if brokerage services can drive more Apple Card signups, it could be a very lucrative endeavor for Apple.
The iPhone as a service
Apple currently offers the iPhone Upgrade Program. For a monthly fee, you get AppleCare + and you can update your iPhone every 12 months. It now also offers an Apple One subscription service, which bundles up to six Apple services for a monthly fee, and notably doesn’t include AppleCare.
There is an opportunity here for Apple to bundle the iPhone Upgrade Program with Apple One, so that customers only pay a monthly bill to Apple and get pretty much everything the company has to offer.
Although the iPhone already has a large number of retention, the phone’s refresh cycle has become much more extensive in recent years. Pushing more consumers to the subscription model, where they can upgrade annually, will help reduce the average life span of the iPhone and spur additional sales of Apple’s most important product.
Adding a higher tier to Apple One that includes iPhone, AppleCare +, and possibly additional benefits or exclusive offers, could produce a significant increase in revenue if it leads to more frequent device updates.
The service business will continue to change
Apple may not launch any of the above services, but investors should expect the services sector to remain at the center of management and undergo further changes in 2021. The fast-growing segment is a key driver of Apple’s profits, but it is supported by services like the App Store. Incremental changes this year with services like the ones mentioned above won’t have a significant impact in 2021, but could become long-term drivers of the wider Apple ecosystem, which would result in a rise in the FAANG share price.
- According to this source 3 new services that Apple could introduce in 2021
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