Like the man said: follow the money.
In looking at Apple’s most recent financial quarterly results, you can learn a lot about the company’s strategy by seeing where the company is doing well. As chief financial officer Luca Maestri pointed out on the call, Apple’s primary investments have traditionally been in research and development, and it’s a good bet that it will focus many of those funds on areas that are growing.
As I listened to this week’s financial recap of Apple’s latest blockbuster quarter, I kept my ears perked for mentions of the places where the company seemed to be doing particularly well. That’s because Apple famously prides itself on skating to where the puck is going—which generally means the areas where people are responding well to its products.
Ready to wear
If there’s one standout bright spot in this quarter’s results, it’s probably Apple’s wearables/home/accessories category, which grew a staggering 54 percent year over year to a revenue of $6.5 billion. To put that in a larger context, Tim Cook said that the wearables business “generated more annual revenue than two thirds of the companies in the Fortune 500.” For a business that more or less didn’t exist five years ago, that’s a heck of a growth curve.
The upshot? Don’t expect Apple to back off wearables anytime soon. Given that the category currently encompasses the Apple Watch, AirPods (and new AirPods Pro), and the Beats audio devices, there’s still a ton of room left to expand. Of course, a much-rumored Apple augmented reality headset is the primary target of speculation here, but even should that materialize, that’s still only a small percentage of the body accounted for. There are plenty of other possibilities, from smart rings to additional health sensors that can communicate with your Apple Watch. Dare I even speculate about, some day, smart shoes?
Wearables are the most personal form of technology that Apple has developed—they’re on our bodies, after all—and that tends to engender strong feelings. Cook also argued that wearables represent different things to different customers: fitness to some, health to others, communication, and so on. That means they have broad appeal to a wide variety of potential customers. Apple’s success in the category has proved that wearables are a viable and profitable market, so the company’s not about to stop here.
Back in 2016, Apple set an ambitious goal of doubling its annual services revenue by 2020. How’s that going? Well, Apple’s revenue for services in fiscal year 2016 was $24 billion; by comparison, in 2019, that category accounted for $46 billion in revenue. (And, as a side note, the gross margin for Apple’s services in 2019 was $26 billion, more than that revenue from fiscal 2016.)
At this point, it would be a far bigger shock if Apple didn’t blow past that goal next year. Cupertino’s push into services this year has been strong, with Apple News+, Apple Arcade, and Apple TV+ joining Apple Music, iCloud, Apple Care, and so on. In the wake of those initiatives, the biggest question is whether Apple plans on focusing on beefing up its current offerings or just continuing to launch new services.
Given that Apple TV+ is just now launching and Apple Arcade is only now reaching the point of users concluding their free trials, I wouldn’t be surprised if the company decided to hold off on adding any additional subscription services at present, and instead decided to try and entice more new customers to the services—hence plays like the free year of Apple TV+. With TV streaming options launching from AT&T/Warner Bros. and Comcast/NBC next year, there’s a real danger from subscription fatigue, and Apple definitely wants to lock in its customers as soon as possible.
iPadding the margins
What a turnaround for Apple’s tablet. The device that was poised to revolutionize the way we interacted with our computers took a sharp nosedive in sales over the last couple years, but it seems to have rebounded with a healthy profit in more recent quarters.
There are a few points working in the iPad’s favor: first of all, Apple’s investment in the iPad Pro has proved to be a winner, with many people seeming increasingly comfortable using the tablet to do work that they used to do on a laptop, despite the unending arguments about whether or not the devices are suitable for “real work.”
But I think the bigger advantage is the breadth of offerings in the category. You can get a very capable iPad starting all the way down at $329, which includes compatibility with the Apple Pencil and the Smart Keyboard, or you can spend as much as $1700 to get a 12.9-inch iPad Pro with all the fixings. That’s an enormous range of options, at price and performance points to satisfy all comers. By comparison, the iPhone and Mac product lines have definitely felt weighted more towards the high-end in recent years.
That makes the iPad a good template for the rest of Apple’s products going forward: different people have different needs, and why cast a narrow net when you can cast a broad one? In some ways it flies in the face of Apple’s traditional top-down strategy, but as technology our uses of technology becomes more personal, our devices need to follow suit. The results certainly don’t lie.