Roughly a year ago, Apple (NASDAQ:AAPL) CEO Tim Cook announced an ambitious goal of doubling the company's services revenue within four years. The App Store will have to play a major role in this growth story, as the largest piece of Apple's services segment.
So far, so good. Services revenue reached $30 billion in fiscal 2017, up 23% year over year. Even excluding a favorable one-time revenue adjustment of $640 million, Apple would have posted a 21% increase in services revenue. Robust App Store sales growth was one of the key drivers of this strong result.
The importance of the App Store
In recent years, Apple has routinely provided details in early January about App Store sales trends for the previous calendar year. Four years ago, it noted that customers had spent in excess of $10 billion on the App Store during 2013, putting Apple's 30% cut at more than $3 billion.
Billings then rose 50% in 2014 to more than $15 billion. In 2015, App Store gross sales passed the $20 billion mark, implying year-over-year growth of roughly 30% to 40%. For calendar 2016, Apple disclosed that developers earned more than $20 billion -- up more than 40% year over year -- putting gross billings at about $29 billion.
Thus, App Store sales roughly tripled between 2013 and 2016. This helped make the App Store the biggest revenue driver within Apple's services business by 2016, accounting for 33% of its revenue, according to RBC Capital's Amit Daryanani.
Another App Store record
On Thursday, Apple revealed that App Store sales have continued to grow at a strong pace over the past year. iOS developers earned $26.5 billion in 2017, up more than 30% year over year, and customers spent a record $890 million on the App Store during the week beginning on Christmas Eve.
However, there is one important caveat for investors to be aware of. In late 2016, Apple changed its revenue-sharing policy for subscription-based apps. For people who sign up for a video streaming service through the App Store (or an Apple TV), Apple reduced its cut from 30% to 15%. For nonvideo subscription services, Apple's fee remains at 30% for the first 12 months but drops to 15% thereafter.
As a result, the growth in payments to developers is starting to outstrip growth in Apple's cut of App Store sales. Based on a clean 70%/30% revenue split, Apple's revenue from the App Store would have been $11.4 billion last year. By contrast, if its average revenue split were 71%/29%, the statistics released on Thursday would imply $10.8 billion of App Store revenue for Apple.
While the reduced fee for subscription services negatively impacted Apple's haul from the App Store in 2017, net revenue still probably increased strongly. Additionally, this sacrifice could pay off in the long run by making the App Store a more attractive sales channel for subscription services.
More growth ahead
Looking ahead, new augmented reality (AR) capabilities such as 3D sensing included in the latest generation of iPhones could unlock meaningful growth potential for the App Store. Right now, only the small proportion of iPhone users who have upgraded to the latest models can take advantage of these features.
However, if Apple is in the early stages of a "super cycle" of iPhone sales -- as many analysts believe -- there could be a huge installed base of AR-ready devices within a year or two. This will make it worthwhile for iOS developers to invest heavily in creating engaging experiences with these new capabilities.
Based on the App Store's stellar track record, it seems quite likely that developers will succeed in harnessing the new iPhones' AR features to create compelling apps that will drive the next wave of App Store revenue growth.
Adam Levine-Weinberg owns shares of Apple and is long January 2018 $90 calls on Apple, short January 2018 $140 calls on Apple, and short February 2018 $160 calls on Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool is long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.