According to number crunchers at IDC that stagnation has been hidden behind the booming success of its services business, which now props up its entire financial structure. Services revenue has grown fivefold since 2015, compared with less than 40 per cent growth from hardware. This shift has turned Apple into less of a device maker and more of a ticket collector in a digital theme park within its own walled garden.
Services deliver nearly 40 per cent of gross profit, despite making up just under 25 per cent of revenue. With margins north of 70 per cent, services include subscriptions, ads, and two critical pipelines: App Store commissions and Google’s payments to remain Safari’s default search engine.
Apple's problem is both of those streams are facing serious legal scrutiny. A California judge recently ruled Apple must allow developers to sidestep the App Store for payments, undercutting Apple’s ability to skim 30 per cent off the top. In Europe, the Digital Markets Act is forcing similar changes. Bank of America reckons Apple could lose up to 10 per cent of net profit if developers shift en masse.
The Google deal is even more precarious. It accounted for six per cent of Apple’s revenue and 19 per cent of operating profit in the past year, according to Bank of America.
The US Justice Department, having won an antitrust case against Google, has asked a judge to cancel the Safari search agreement. During trial testimony, Apple services boss Eddy Cue admitted, “I’ve lost a lot of sleep thinking about it.”
Wall Street, which once rewarded Apple’s pivot to services with a higher earnings multiple, is now starting to question how sustainable those profits really are. After a pandemic-fuelled boom, services growth has slowed. Investors are watching closely to see whether Apple can replace the high-margin revenue it may soon lose.
The upcoming earnings call will show how far Job's Mob can still coast on its locked-in ecosystem. But with legal knives out in the US and EU, and iPhone sales stuck at 2015 levels, the gloss on the services story is starting to wear thin.
