The App Store And iTunes: Growth Drivers And Drags

43.62%

9.55%

7.24%

28.22%

This is the growth rate in Apple’s revenues over the last four years, for an annual average of 21.7%. In 2015, the company racked up more than $231 billion in sales. High rates of growth aren’t typically associated with such a large revenue base, yet Apple has defied convention.

That’s what makes what Apple does for an encore so intriguing. Growing revenue by just 10% in 2016 would require finding a new $23 billion business. To put that in perspective, that’s more than Time Warner Cable made in all of 2014.

Apple has the cash to acquire its way to that kind of growth, but that would be out of character. Growing from within is more familiar, yet the bigger the company gets, the harder that becomes.

The hardware side of the house probably cannot deliver that kind of growth this year. In fact, Apple’s existing product line is flat to declining, with the iPhone, iPad, and Mac all down double-digits year-over-year for the most recent quarter.

Its most recent offering, Apple Watch, is forecast to have sold around 12 million units in 2015. Assuming a 30% wholesale-to-retail markup ($349 retail price for the Sport model), let’s assume that Apple made $3.2 billion last year (12M units  x $268 wholesale). Apple would need its watch sales to increase about eight-fold to deliver $23 billion in additional revenue. That’s not going to happen.

All-new hardware initiatives (e.g. maybe a car or a television) are shrouded in secrecy and likely several years from the market, if they ever get there.

That leaves its services business. It grew 20%, from $5 billion to $6 billion in the most recent quarter. As a rare source of growth, Apple may look to the App Store, iTunes, and Apple Music to be its next engine for revenue and profit acceleration.

These services, though, are looked at by many as the weakest part of Apple’s offering. Searching “#itunessucks” on Twitter reveals a colorful stream in multiple languages about deleted, “stolen,” or missing songs and syncing issues. The App Store has become a victim of its own overwhelming success, with over 1.5 million apps making discovery of anything in the long tail extremely difficult. Apple is rumored to be looking at making significant changes to the way this marketplace works.

Yet significant software and services innovation will only get tougher. As the number of iOS-based third-party developers and apps increase, and as more consumers download these apps, the population of people who become accustomed to the status quo, warts and all, gets bigger. It would have been difficult to introduce big changes when the App Store reached 500,000 or 1 million apps. It has only gotten harder since, and as long as this ecosystem grows, it will continue to get harder at Apple, as it would at any company. It’s why today’s iPhone/iOS looks and works so much like an iPhone back in 2007.

As strange as it is to say about a company with so much cash, I don’t envy Apple at this moment. It doesn’t seem to have what it takes to satisfy investors accustomed to fantastic growth rates. Apple could look to software and services for that growth, but doing that would require changes that risk alienating a captive audience of developers and consumers.

Apple’s fans, investors and employees could be about to enter an unfamiliar phase, at least for the foreseeable future: Apple as a value company.

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2 comments

  1. Why isn’t earning a zillion dollars a year good enough? Why is “only” a 7% rate of return seen as bad? What’s the difference between now and when people invested in so-called “blue chip” companies that sailed along really well with guaranteed returns? I’m an amateur so these may be naive questions but..And what do you think the Feds will do about Apple’s hiding income in Ireland to avoid taxes? How would a crackdown affect it and company with similar policies?

    Liked by 1 person

  2. Thanks for the comment. I don’t think this is a matter of what’s good or bad, but rather what was and what will be. Apple has defied all expectations by being really big and growing really fast. That combination delivers enviable results to more than just Apple’s stockholders. It enables Apple to recruit new employees differently, offering stock awards that almost certainly would appreciate quickly and, perhaps, less in base pay, all while dangling the possibility of building something that hundreds of millions of users around the world can enjoy. When growth slows, all the benefits to employees, stockholders, and customers need to be rethought.

    Like

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