What it is: Most people think of Apple as the iPhone company, but Apple is quietly making money selling services as well.
Selling hardware isn’t easy. Just ask all those Android device manufacturers who keep losing money selling smartphones and tablets, or all those PC manufacturers who have to keep cutting prices until their profits practically evaporate. When you sell hardware, it’s mostly a commodity.
Apple has resisted this commodity business by offering devices only they sell such as the Macintosh, iPhone, iPad, and Apple Watch. While you can always find alternatives to Apple products that are often cheaper, they’re also less reliable and often poorly built as well. That’s why Apple can get away with charging more because they offer higher quality materials for people willing to pay more to get more.
Yet even Apple can’t resist steadily dropping prices on devices. Apple released the iPad mini after Android manufacturers started flooding the market with low-cost, small Android tablets. Apple also released the Mac mini so they could sell lower-cost Macintosh computers.
With the smartphone market getting saturated and fewer people buying smartphones for the first time, Apple can no longer rely on increasing harder sales. Instead, Apple has been slowly moving towards services. The recent popularity of Pokemon GO indicates that Apple will make $3 billion dollars from this single video game alone.
That’s because Apple is more than just hardware sales. Apple also sells streaming music subscriptions and apps where Apple takes 30% of any money an app makes. That means a popular app like Pokemon GO has the potential to earn Apple more money than Nintendo since Nintendo has to split their profits with another company that developed the Pokemon GO app.
Apple will likely continue selling devices, but once people own those devices, Apple wants to make more money selling those people services. That’s the huge drawback with most Android manufacturers (except for Samsung) because once they sell you a smartphone or tablet, Android manufacturers can’t make money from you until you buy another device from them.
While Apple can make money from existing customers, Android manufacturers have to make money constantly finding new customers, which is time-consuming and expensive. In comparison, Apple can make money selling to new customers and then make more money selling to existing customers.
Apple Pay gives Apple a cut from every transaction. In-app purchases give money to Apple as well as sales of new apps. Streaming music subscriptions give money to Apple, so Apple has plenty of ways to make money to existing customers. Considering that customers often keep their smartphones for several years, Apple services provides another way to make money from them without trying to sell them a new device.
Chances are good Apple will eventually make more money on services than selling actual hardware. When that happens, selling new hardware will just be a happy extra.