Apple said it had 165 million subscriptions as of its fiscal second quarter and $7.04 billion in revenue. Simply put, Apple services–App Store, Apple Care, Apple Pay and digital content–are on an annual run rate approaching $30 billion and on par with a cable giant like Comcast.


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When you start comparing Apple’s services business to stalwart subscription operations like Comcast, it is a bit jarring. But it’s hard to overlook the obvious. Apple has been talking up services as it monetizes the customer base. Services today take a back seat to iPhone volume and shipments as well as the anticipation for the next big product category (it’s not likely to be the Apple Watch).

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At some point–probably within the next year–our view of Apple is likely to change. The profit margins on services and recurring revenue will be too hard to overlook. And should Apple buy a company like Netflix, its services revenue would soar. CEO Tim Cook noted on Tuesday’s second quarter conference call:

For the second quarter in a row, our Services revenue topped $7 billion, and it’s well on the way to being the size of a Fortune 100 company.

Indeed, App Store revenue was up 40 percent from a year ago. Apple Music and iCloud storage had double-digit revenue growth and Apple Pay transaction volume was up 450 percent. The unique user count is a bit tricky since one person can have multiple subscriptions, but the numbers are large. How large? Consider the following:

  • Apple’s annual run rate for services is more than $28 billion.
  • Comcast’s cable subscription revenue in the first quarter minus advertising and other was $11.7 billion. Call it $46.8 billion in annual revenue.
  • Netflix 2017 revenue is expected to be $11.26 billion. In 2018, Netflix revenue is expected to hit $13.5 billion, according to Wall Street analysts.
  • Amazon’s retail subscription services–Prime, audiobook, e-book, video and music–had first quarter revenue of $1.94 billion. We’ll round it up and call it $8 billion in annual revenue. AWS revenue was $3.66 billion. We’ll round that sum up and call annual revenue $12 billion. Amazon’s retail subscriptions are likely the most direct comparison to Apple’s model.
  • Microsoft’s commercial cloud revenue–dominated by Office 365 subscriptions–is on a $15.2 billion annual run rate.
  • Salesforce’s fiscal 2018 revenue (ending January 30) is projected to be $10.2 billion.

In other words, Apple’s services business is comparable to (or larger than) a number of other subscription businesses with the exception of wireless. Verizon’s service revenue and other category had 2016 revenue of $108.5 billion. Give Apple some time though.

Not surprisingly, analysts are salivating over the margins with services.

Here’s Macquarie’s model:

apple-services-model-macquarie.png

And Stifel’s model:

apple-services-model-stifel.png

Either way the story is the same. Apple’s future is in services. All Apple has to do is keep hardware fresh, use its ecosystem lock-in and deliver services and it’ll be a cash cow for the foreseeable future.

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