Facing Slumping iPhone Sales, Apple Looks to Services to Boost Business The App Store, Apple Music, storage center iCloud and mobile wallet Apple Pay and other services generated nearly $6 billion in revenue, up 20 percent from the previous year.

By Reuters

This story originally appeared on Reuters

TungCheung | Shutterstock.com

Apple Inc.'s first-ever drop in quarterly iPhone sales has spurred Chief Executive Tim Cook to turn the spotlight on prospects for its services business, but the field is rife with competition and may prove challenging for a brand based on gadgets.

Second-quarter earnings saw services emerge as Apple's second-largest business after the iPhone for the first time, topping iPad and Mac sales, which both fell.

The App Store, Apple Music, storage center iCloud and mobile wallet Apple Pay and other services generated nearly $6 billion in revenue, up 20 percent from the previous year. And executives have cheered the progress they are making in subscriptions, touting Apple Music's 13 million paying subscribers.

The size of Apple's installed base with 1 billion devices in consumer hands suggests it has plenty of room to grow in services. Services also promise a recurring revenue stream, unlike hardware sales.

But analysts say Apple faces an uphill battle in carving out the same sort of position in services that it has achieved with its hardware. The $6 billion in services revenue also pales in comparison to iPhone sales which accounted for about two-thirds of the company's $50.6 billion quarterly sales.

Firms such as music service Spotify, cloud storage rivals Google and Microsoft Corp. and map makers have claimed major audiences among iPhone users, even when Apple has offered its own products as a default.

Also raising the stakes for its services business has been Apple's decision to release in March the smaller, much cheaper iPhone SE -- a move that is seen as trading revenue per device for broader adoption of its phones.

"For the strategy to really make a lot of sense, you want to be more aggressive in building that services revenue," said Colin Gillis, an analyst with BGC Partners.

Apple may also have to speed up its game.

"Apple has settled into this annual upgrade cycle for hardware and software," said analyst Jan Dawson at Jackdaw Research. "That's quite different than the way that say Facebook pushes out updates to its app or Google makes changes to its search engine -- they do that almost in real time."

Gillis at BGC Partners calculates that margins for Apple's services businesses are not as strong as the iPhone.

"I don't think any one is ever going to find that kind of sweet spot," he said.

Apple Chief Financial Officer Luca Maestri said on Tuesday services achieve a similar level of profitability for the company as the average of its other businesses.

Pushing ahead in services in China -- Apple's second largest market -- may also be challenging due to regulatory concerns. Chinese regulators have demanded that Apple halt its sales of books and movies in the country, the New York Times reported last week.

"They need (services) in China -- it has to be part of the growth story," said analyst Ben Bajarin of Creative Strategies.

(Reporting by Julia Love; Additional reporting by Anya George Tharakan; Editing by Peter Henderson and Edwina Gibbs)

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Business Ideas

70 Small Business Ideas to Start in 2025

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2025.

Growing a Business

Don't Let These 8 Common Expenses Stunt Your Growth and Drain Your Profits

Here are a few common business expenses that likely won't deliver a return on your investment — so it's time to reevaluate them.

Taxes

File Your Taxes Early With 33% off H&R Block

This version covers federal and state forms, even if you have investments.

Science & Technology

What Is 'AI Tasking'? Entrepreneurs Are Using This Viral Strategy to Save 3 Days a Week

Want to 10x revenue without hiring? AI automates marketing, saving you 3+ days/week. Learn 4 AI tools for content, chatbots, leads & sales. Get the free 'AI Success Kit' + a chapter from Ben's new book!

Business News

'Affluent People Love a Deal': These Luxury Items Are Flying Off the Shelves at Costco, According to the Company's Longtime Chairman

Some Costco customers are washing down their $1.50 hot dog combo with fancy Champagne, apparently.