As Apple's (NASDAQ:AAPL) iPhone sales growth leveled off in recent years, management has been attempting to shift investor attention toward the tech giant's rapidly growing services segment. The segment offers continued growth prospects and a more reliable revenue stream than Apple's more volatile hardware sales.
While Apple's services segment is benefiting from a broad base of growth drivers, including App Store sales, Apple Pay, Apple Music, and more, App Store sales serve as the segment's primary catalyst. That's why when Apple shares an update on its App Store business, investors may want to take note.
On Thursday, Apple shared an update on its App Store, including the announcement that all-time App Store earnings paid to developers hit $70 billion. Here's what investors should know.
Still a major catalyst
Overall, Apple's latest data on its App Store continues to drive home one important point for Apple investors: The App Store is more integral to Apple's business than ever before.
Consider these takeaways from Apple's App Store update:
- All-time gross App Store revenue, including Apple's 30% cut and developers' 70% cut, has now hit $100 billion.
- Apple's cut of App Store Revenue is about $30 billion.
- Developer earnings from the App Store are up 40% since August 2016, growing from about $50 billion to $70 billion.
- App Store downloads are up more than 70% in the trailing 12 months compared to the preceding 12-month period.
In its update on App Store sales, Apple also provided some context on App Store categories driving this growth. Gaming and Entertainment, thanks to "breakout hits" like Pokemon GO and Super Mario and streaming-TV subscriptions like Netflix and Hulu, are the top-grossing App Store categories, Apple said.
Further, thanks to Apple's more accommodating policies on recurring subscriptions (the policies were revamped last year), subscriptions have now expanded to every app category and are up 58% year over year.
Why it matters
Investors are increasingly looking to Apple's services segment as the next frontier for the tech giant's growth. In Apple's most recent quarter, services revenue increased 18% year over year, helping make up for some of the iPhone segment's much slower growth. IPhone revenue was down 1% year over year.
Of course, Apple's services segment is much smaller than Apple's iPhone segment. In the second quarter of 2017, for instance, services revenue was $7 billion and iPhone revenue was $33 billion. But, with the help of surging App Store revenue, which was up 40% in Apple's second quarter, Apple's services business is growing as a percentage of total revenue. In Q2, services accounted for 13.3% of total revenue, up from 11.8% of revenue in the same quarter in 2016.
Investors will watch for Apple's App Store to continue helping the tech giant's services business grow into a more meaningful operating segment for the company. Looking out to 2020, Apple believes its services business can grow to twice the size it was at the end of 2016 -- and Apple's going to need App Store revenue to continue growing nicely for this to happen.