Jul 31, 2019 - Technology

Apple's growth areas rely on its shrinking iPhone business

Ina Fried
Apple's new iPhone-powered credit card, Apple Card

Apple's new iPhone-powered credit card, Apple Card, launches next month. Photo: Apple

With its latest earnings numbers, Apple proved once again that its growing services and wearables businesses can help lead the company to record financial results even as iPhone sales fall short of prior years.

Why it matters: This strategy is a creative way to manage through a maturing smartphone market, but Apple's business is arguably just as dependent on the iPhone as it has ever been, perhaps more so, because these new businesses are tied at the hip to the device.

Details: Apple is seeing its strongest growth in wearables and services, which Apple said combined are now the size of a Fortune 50 company.

  • Wearables: Growth in the unit, which includes AirPods and the Apple Watch, accelerated in the quarter to more than 50%. It's the size of a Fortune 200 company, with a quarterly revenue of $5.5 billion.
  • Services: Apple has steadily grown this business over the past few years and this past quarter revenue topped $11.5 billion, or more than one-fifth of company revenue. CEO Tim Cook confirmed on the conference call that the Apple Card credit card will launch next month, while its Arcade and Apple TV+ services are due later this year.
  • These product lines don't represent wholly independent new businesses. Rather, they are smart extensions of the iPhone franchise, and a way for Apple to derive additional revenue from a base that isn't growing.

History lesson: Apple has been most successful when it applies its design and technical smarts to take on whole new industries.

  • Although the iPod was Mac-only in its earliest days, its real success began when it became able to connect with Windows computers and wasn't solely dependent on Apple's desktop business. (Indeed, the iPod ended up having a halo effect and helped Apple boost its market share in the computer space.)
  • So, too, with the iPhone, which was independent of the Mac.

Contrast that with Apple's current growth businesses. At least so far, the Watch, AirPods and Apple's services are highly tied to — if not entirely dependent on — Apple's hardware, particularly the iPhone.

Yes, but: Just because Apple's new businesses depend on iPhones doesn't mean they can't succeed in a time of flat or declining new sales.

  • As Cook pointed out, these businesses are building not on the last quarter's sales but on a large user base that is actively using the devices — and willing to spend.

Go deeper: Apple needs a next act

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