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CORE of Apple's future success

App stores, iTunes company's fastest-growing segments

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When it comes to Apple, gadgets grab all the glory. If fans aren't talking about popular products that actually exist, like the iPhone, they're dreaming about ones they hope and pray might one day come to be, like an iWatch or Apple television.

Yet it's the things that people actually do with all that shiny Apple hardware that may quietly be transforming its business.

During the company's quarterly earnings call this week, Apple executives highlighted that the fastest-growing segment of its business over the last nine months has been revenue from its iTunes and App stores along with its cloud services.

Right now, that category ranks fourth for Apple, behind iPhones, iPads and Macs. But not by much. And it's easy to see how it could eventually become the second-largest part of Apple's business in the next couple of years. And why it may increasingly become a key advantage for the company against rivals like Samsung Electronics.

"We're continuing to invest in our incredible ecosystem, which is a huge asset for Apple and a very important differentiator of our customer experience," said Apple chief executive Tim Cook in a conference call Tuesday.

'There's been an astronomical uptick in the purchasing of apps over the past 12 months'

For the foreseeable future, Apple's business will be primarily about the iPhone. In its fiscal third-quarter results reported Tuesday, iPhone sales were $19.75 billion, or 52.7 per cent of revenue.

Coming in second were iPads, which generated $5.89 billion in revenue, followed by Macs, with $5.54 billion. Although iPads have struggled with declining sales, Macs saw nice growth despite an overall decline in the market for laptops and PCs.

Still, none of these could apparently match the rate of growth in the category officially known as iTunes/Software/Services. That category brought in $4.49 billion, up 12 per cent from a year earlier, and is coming on strong.

Cook said iTunes billings rose 25 per cent from a year earlier. That includes music downloads and movies, and is remarkable given that the broader market for digital downloads has been in decline due to competition from streaming and subscription services.

Apple this year said it would pay $3 billion to acquire Beats, the maker of headphones, because it liked the company's streaming-music services. That deal is expected to close before the end of September, Apple said this week. But for the moment, the download business that Apple pioneered more than a decade ago seems to be holding up just fine.

At the same time, the company appears to be seeing an explosion in the volume of apps that users are buying. Luca Maestri, Apple's chief financial officer, said this week 75 billion apps have been downloaded from the App Store and the company has paid $20 billion to developers. Of that, Maestri said $10 billion had been paid in just the last year.

"What struck me as much as the number itself was that they said half of that was in the last 12 months," said Charles Golvin, an analyst at mobile market research firm Abelian Research. "That says there's been an astronomical uptick in the purchasing of apps over the past 12 months."

Apple didn't discuss what specifically was driving that growth in app sales. But it's worth noting the company said there was a leap in iPhone sales in China in its third quarter, as well as other emerging markets such as Brazil and India. Golvin said a rush of customers new to Apple products could explain part of the app sales increase this year.

But another possible explanation is that as Apple customers expand the number of Apple products they own, they're finding more reasons to download apps. Indeed, the company likes to highlight the fact that customers who own Apple products use them more frequently than tablets and smartphones made by competitors.

Whatever the reason, the growing revenue from iTunes sales, apps and services reflects how the business of hardware is likely to change going forward, as well as how Apple is viewed. Most analysts, for instance, go to great lengths to forecast sales of Macs, iPads and iPhones. But few spend time scrutinizing the iTunes or app business for their effects on Apple's results.

More important, those content and app sales speak to the advantage Apple continues to hold when it comes to attracting the best developers. Although the Android operating system remains the world's largest mobile platform, the wide range of devices and manufacturers makes it hard to write quality apps that run equally well across all devices.

Indeed, Samsung, which has the largest global smartphone market share, recently reported disappointing earnings and sales of its smartphones. Analysts have said the company is having a harder time making its hardware stand out. Recently, the South Korean company has begun investing heavily in a Silicon Valley expansion in the hopes of attracting more developers as well as creating services that are unique to its hardware.

But in that respect, Apple remains ahead of the pack. And that means developers who want to make money will continue to turn to Apple first.

"I don't think there's any question on the part of app developers which is the more valuable platform," Golvin said. "This has been the case since the launch of the App Store, and I don't think that's going to change any time soon."

-- Los Angeles Times

Republished from the Winnipeg Free Press print edition July 25, 2014 B10

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