Apple, which touts more than a billion of its devices in use around the world, is trying to steer the attention of Wall Street away from falling iPhone sales and toward services.
The computer hardware maker on Tuesday said sales of iPhones continued to fall in the fiscal second quarter, dropping 17 percent from a year ago. Its services business grew 16 percent in the quarter.
Services are all the things Apple tries to sell its customers after they’ve purchased one of its devices, like Apple music, iCloud storage for photos and AppleCare warranties. Its quarterly services revenue was $11.45 billion, up from $9.85 billion a year ago. But iPhone sales are still nearly three times as large, at $31 billion in the quarter.
In March, Apple put the spotlight on new services it’s rolling out to try to make up for flagging iPhone revenue. Celebrities like Oprah Winfrey and Steven Spielberg stood onstage at the company’s Steve Jobs Theater in Cupertino, Calif., and announced a planned streaming service. But Apple didn’t disclose details like the price of the service, raising question marks for investors about just how much revenue the effort might bring in.
Apple also launched a subscription news service, a videogame service and a new credit card last month. Apple CEO Time Cook hinted Tuesday that there were more new offerings to come. “We’re always working on new things,” he said in a call with analysts.
In recent quarters, Apple had been touting its growing “installed base,” the number of Apple devices being used globally. But Apple didn’t report a marked increase in that number, either, pointing to same figure — 1.4 billion — that it reported last quarter.
Apple argues that its large number of users gives it an advantage over competitors. Apple’s $9.99 a month music streaming service, launched in 2015, has already roped in 50 million paying subscribers, it announced last quarter. While that number is still only half of Spotify’s 100 million, Apple was coming from behind.
Music streaming is different, though, because the content on Apple’s offering isn’t substantially different from Spotify’s. In video streaming, where competition is increasing and prices are dropping, Apple’s content will be compared to that of Netflix, HBO, Showtime, Disney and others.
Last month, Disney announced the launch of its Disney Plus service. For $6.99 a month, customers will get access to franchises like Frozen, The Avengers and Star Wars, as well as TV shows like The Simpsons. While some analysts had expected an Apple subscription price north of $10, somewhere in Netflix and HBO territory, pricing it looks increasingly tricky. “I get a sense that people aren’t sure where they’re going to price it,” said Betsy Sigman, a professor at Georgetown University’s business school. “I can’t imagine Apple giving up a lot for $6.99.”
Apple’s stock was up more than 5 percent in after-hours trading. Apple’s stock price had slumped earlier this year, after it announced slower than expected iPhone sales. That slowdown was mainly due to China’s economic woes.
On Tuesday, the company signaled that the woes in China were coming to an end. Cook told analysts that the “trough” of China’s economy was reached in November and December. Apple’s sales have been improving in China, he said, for several reasons. The company lowered its iPhone prices there to offset the country’s weakening currency. The country’s stimulus programs and its lowering of sales tax from 16 percent to 13 percent have also helped. “We certainly feel better than we did 90 days ago," he said.
Apple’s fastest area of revenue growth – wearables - has largely been overshadowed by slowing iPhone sales and the company’s push into new subscription services. Apple brought in $5.1 billion in wearables in the second quarter, up nearly 50 percent from a year ago, the company said.
Wearables, such as Apple Watch or AirPods headphones, could play an important role in Apple’s future plans by providing new opportunities to sell something. Cook confirmed Tuesday that medical services were an increasingly important segment for the company, highlighting the Apple Watch’s health tracking benefits and saying the company is only just getting started in the area. As wearables add more sensors that monitor the body, they could be Apple’s path to more health-related services, a direction some experts, such as former Apple CEO John Sculley, believe the company is headed.
In an interview with The Washington Post, Sculley predicted that Apple would charge a membership fee for a product that will store medical data securely and allow patients to connect directly with doctors.
Wearables also act as connective tissue for Apple’s array of products. Its watches, for instance, can unlock Mac computers without need for a password and control the music playing to a set of AirPods. If Apple introduces its long anticipated smart glasses, there will be yet another Apple product aimed at keeping people tethered to Apple’s product lineup.
Each of Apple’s wearables counts as yet another “install.” But for all of Apple’s emphasis on the install base, it has stalled in one other metric: Marketshare. Apple’s share of the smartphone market has remained the same in its strongest market, the U.S., at about 45.2 percent, according to research firm eMarketer, and Google’s Android controls the rest. Apple’s share of the U.S. tablet market in 2019 is predicted to drop to 45.6 percent from 46.3 percent last year, according to the research firm.
One thing Apple didn’t spend much time on during its analyst call Tuesday was 5G, which became a central theme in Apple’s all-out war with Qualcomm, maker of cellular modems and other technology. Apple threw all of its weight into trying to bring Qualcomm to its knees in an effort to lower iPhone manufacturing costs.
In the end, it turned out that Qualcomm was Apple’s only viable supplier of 5G modem chips. Intel had been one potential supplier for Apple. But after Apple and Qualcomm settled their more than 80 lawsuits worldwide, Intel announced it was pulling out of the race to develop 5G chips – a race Qualcomm seems to have clearly won.
Apple has also been hiring experts in wireless technology in San Diego in an effort to build its own modem technology, which could reduce the cost of building an iPhone.
"We’re glad to put the litigation behind us,” Cook said Tuesday during the earnings call. “We’re very happy to have a multi-year supply agreement and we’re happy to have a direct license arrangement with Qualcomm,” he said. “We feel good about the resolution.”