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How Apple Inc. Hopes to Grow Its Services Business to $50 Billion by 2020

By Motley Fool Staff - Feb 10, 2017 at 1:00PM

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We focus on a high growth segment that helped to push the company's results over the top in its latest report and what investors can expect next.

Services continue to be an increasingly important segment for Apple (AAPL 0.17%), in part due to the recurring nature of the revenue it produces. In this segment from Industry Focus: Tech, the cast discusses how Apple plans to double the size of this business over the next four years.

A full transcript follows the video.

This podcast was recorded on Feb. 3, 2017.

Dylan Lewis: One of the segments that is gaining more and more attention from analysts and the market in general is Apple's services segment. This is the iTunes Store, the App Store, Apple Pay, Apple Music, TV App Store, etc. Services, this time, came in at $7.2 billion, which is roughly 9% of revenue. But, perhaps more impressively, it was up 18% year over year. It seems like the company and the Street are both giving this a little bit more emphasis as time goes on.

Evan Niu: Yeah. And that was a quarterly record, one of those records they set this quarter. If you look at it now on a trailing 12-month basis, services has now crossed $25 billion, in terms of the size of the business. So this is a huge business already. Here's the crazy thing: They're very ambitiously saying they're hoping to double the services business within four years. That's saying, "We think we can make this a $50 billion business by 2020." Which is pretty ambitious. As far as how they'll get there, they highlighted a couple things. First of all, now, there are 150 million paid subscriptions that are being automatically billed, recurring subscriptions. That includes Apple's services as well as third-party services. But that's the total number that is being billed through iTunes and the App Store right now. That's a pretty big number. They do expect that to keep growing. That's a pretty big base of regular subscriptions of various types of services that they sell. Transaction volumes are going up, the installed base is growing. There's really all these different aspects of it. They even mentioned -- this is kind of surprising -- the iCloud storage business is growing quite a bit. I would never have thought it would be a growth driver. But, basically, all these different aspects are really putting up good growth, and combined, they're really bullish about this going forward. It's a pretty ambitious goal there.

Lewis: Yeah. Looking at the inputs of what makes up that services revenue, there's momentum on both sides. Not only is the installed base is getting larger -- so, the number of people that are actually somehow transacting with the services segment -- they indicated in the call that that's increasing in the strong double digits. Also, the ARPU (average revenue per user) for each paying customer is increasing in the double digits. So it's not that one side of that equation is really crushing it and the other one is stagnating. Both sides are performing well. And I think that's what you want to see. 

Niu: Yeah. And they also had mentioned the music business, which had been declining for quite some time, for many years. Before Apple got into the streaming side, when it was all the download business for music, as people shifted toward streaming, that business was shrinking. Now, we're back to this inflection point where music is growing again. If you include both download and streaming -- so both iTunes plus Apple Music -- if you combine them, the music business as a whole is now growing again. That's always nice to see, particularly as the shift toward streaming continues, more and more people are willing to pay. The industry itself really likes the shift to paid streaming versus ad-supported streaming. And Apple is a big proponent in that transition. That's also another good sign. They are really helping the music industry grow as a whole, as well as their cut of the whole music business growing again.

Lewis: And you have to like that, considering that they are, what some people might argue, kind of a late entrant into streaming music. You already had Spotify with tens of millions of people using it, and you might have wondered what adoption might have looked like for Apple Music and the streaming service. But results seem to be pretty good so far.

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