Apple’s lucrative Services business under pressure as investors eye June quarter results

Apple’s Services business, which includes iCloud storage, Apple Music, Apple TV+, and other subscriptions, paid apps and app advertising, as well as payments related to web search, as a group have quintupled since 2015, while device revenue has grown less than 40%. And those services generate significantly higher gross profit margins: north of 70%, estimates Bank of America, compared with roughly 30% to 40% for hardware sales. But, now, Apple’s lucrative Services is business under pressure as investors eye June quarter results due this Thursday.
*Profit shares are Bank of America estimates Wearables,home and accessoriesNote: Figures may not add up to 100% due to rounding.Sources: the company (share of revenue); Bank of America (share of profit). Image: WSJ
Rolfe Winkler and Nate Rattner for The Wall Street Journal:
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That means the services business has a greater impact on Apple’s profit than on its revenue.
Yet after a big boost during the pandemic, growth of services has moderated, and two clouds are visible on the horizon that could reduce or even eliminate key parts of the business.
A primary component of Apple’s services business is the fees Apple collects on sales in its App Store, which drove almost a third of the total services revenue in the fiscal year that ended in September, according to Bank of America estimates.
Some developers say the fees are usurious and have appealed to regulators or sued Apple to force changes. A California judge ruled that Apple must allow app developers to sell their iPhone services from their own websites. In that scenario, she said, Apple can’t collect any fee at all.
In a worst-case scenario, Bank of America estimates that Apple could lose 10% of its net profit. But that assumes all large developers shift all of their app purchases outside the App Store, which is very unlikely, and Apple is appealing the ruling in the U.S.
In the European Union, a law called the Digital Markets Act requires similar changes to allow developers to avoid Apple’s fees.

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MacDailyNews Take: The available data suggests that Apple’s App Store revenue in the European Union has not taken a significant hit following the introduction of third-party app stores to comply with the Digital Markets Act (DMA), which came into full effect in March 2024. Instead, evidence points to continued revenue growth, with minimal impact from alternative app stores.
A report from Investopedia, citing Bank of America analysts and Sensor Tower data, indicates that Apple’s App Store revenue in the EU rose by 13% in the fiscal third quarter of 2024 compared to the same period the previous year, reaching an estimated $7.5 billion. This growth occurred despite the DMA’s allowance for third-party app stores and alternative payment systems. The analysts noted that consumer behavior remained “largely unchanged,” with only a small number of downloads occurring through alternative app stores, suggesting that the App Store retained its dominance.
Apple’s App Store continues to benefit from its seamless integration, trusted brand, and features like In-App Purchase, which are not fully supported in alternative marketplaces.
Winkler and Rattner continue:

The next piece of Apple’s services business—and one of its most lucrative—is the money Google pays so it gets to be the default search provider in Apple’s Safari web browser.
It accounted for about 6% of Apple’s overall revenue in the 12 months through March, estimates Bank of America. But because it has essentially no costs associated with it, it falls straight to the bottom line, where it accounts for 19%, or nearly a fifth, of Apple’s total operating profit.
After the Justice Department won its antitrust case against Alphabet’s Google, it asked the judge to throw out the search giant’s Apple contract, which the judge is still considering.

Apple’s estimated subscription-services revenue, quarterly
Source: Bank of America (Image: WSJ)
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MacDailyNews Take: Apple has cornered the market on premium customers; the people with means and the proven will to spend it. Without Apple device users, Google has much less value to sell to advertisers. A bunch of cheapskate Android settlers, willing to handicap themselves with cheap iPhone knockoffs, just aren’t an appealing target demographic. This is why Google pays Apple some $20 billion annually.
So, if Apple were ever forced by a judge to make their own search engine, beyond just being required to present a default search engine choice dialog box to Apple Safari users (the most likely outcome), then “Apple Search” would quickly begin to amass the cream of the crop in search engine users – a high-value demographic that would be coveted by high-paying advertisers – an avenue to begin replacing Google’s payments to access those online users with money and taste.

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