What if everyone is wrong about Apple Inc.’s most closely watched growth business?
Investors have been obsessed with what Apple calls its “services” segment — a grab bag that includes the company’s cut of iPhone app sales; the AppleCare warranty program for devices; and subscriptions for internet add-ons including Apple Music, iCloud digital file storage and perhaps soon a Netflix-like online video service and news subscriptions.
The idea in the investment community is that this fast-growing part of Apple’s business — services revenue reached $36 billion the last 12 months, up 28 percent from a year earlier — is evidence of Apple becoming less hostage to the ups-and-downs of selling iPhones to people who maybe only purchase a new smartphone once every few years.
The thinking goes that Apple is becoming an annuity business in which people pay on a continuing basis for a collection of products and services, including phones, digital entertainment, protection for their gadgets and more. It sounds great, doesn’t it?
But stock watchers at Goldman Sachs threw some cold water on this vision of Apple’s transformation. In new research, the firm estimated that about $9 billion of Apple’s expected 2018 services segment revenue — about one-quarter of the estimated total — has almost nothing to do with Apple itself.
Goldman estimated the $9 billion is coming from Google, which pays Apple for the privilege of being the built-in search engine on Apple’s Safari web browsers, on Siri and some other spots on Apple devices. Google constantly talks about the pile of money it’s paying to Apple and others, and Google investors track it fanatically. Apple, by contrast, never talks about its revenue stream from Google, and investors never seem to care about it. If Goldman’s figure is correct, however, it should dent investors’ beliefs about Apple’s business transformation, and it calls into question Apple’s moral proclamations about digital advertising.
Most estimates of Apple’s revenue from Google are more like $3 billion to $4 billion a year rather than double or triple that figure. But it is true that in its recent financial reports to the Securities and Exchange Commission, Apple has listed “licensing” as the first in a short list of contributors to sales growth in its services segment. “Licensing” includes the money that Apple is collecting from its search contract with Alphabet Inc.’s Google and other sources, including a legal settlement with Samsung.
If Google is the biggest reason for growth in Apple’s services segment — as Apple itself appears to be telling securities regulators — then Apple’s purported transformation into an annuity business is far less than it seems. Apple remains dependent on iPhone sales just as it is has been for years, although the company is smartly finding ways to squeeze more money from the valuable real estate of its Safari web search box. That is not quite the transformation that Apple believers have in mind.
And if Goldman’s $9 billion figure is close to correct, it also undermines Apple’s opposition to digital advertising businesses. Tim Cook, Apple’s CEO, is happy to tell anyone who will listen that his company is morally superior to those grubby companies such as Google and Facebook Inc. that make their money from harvesting people’s digital data trails and using that information to target ads to every man, woman and infant.
Cook is right that the advertising-dependent business models of Google and Facebook give those firms significant financial incentives to be reckless about tracking people’s lives and giving advertisers precise and potentially harmful ways to pitch them on products, jobs and services.
OK, so give Apple credit for not itself employing an aggressive system to harvest personal information for advertising purposes. What if instead Apple is generating one-quarter of its services revenue from enabling Google’s aggressive system of harvesting personal information for advertising purposes? Make no mistake — that is what Apple is doing by cashing those 10-figure checks from Google.
That feels worse, because Apple gets to collect a high-profit pile of money from the spoils of digital advertising without having to be accountable for the downsides of that digital advertising system. It’s perfect, and perfectly hypocritical.
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Google does not disclose the specific amount of money it pays Apple. The company reports broadly what it pays to partners in its advertising business, including Apple and many others.
Of course it’s possible that Goldman’s estimates are wildly wrong. Neither Google nor Apple disclose the payments flowing between the companies or any other terms of their business arrangements.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.
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