In January, Apple (AAPL 0.23%) CFO Luca Maestri set a new goal to go hand in hand with the previously stated target of doubling services revenue by 2020 relative to 2016 levels: The company expected to hit 500 million paid subscriptions on its platforms at some point in 2020. "Given the continued strength and momentum in [the services] business, we now expect the number of paid subscriptions to surpass half a billion during 2020," Maestri said.
Investors should have little doubt that Apple will easily hit that goal.
Slow and steady wins the race
Apple reported first-quarter earnings results earlier this week, noting that it has now grown to 390 million total paid subscriptions across all of its platforms. That includes both first-party and third-party services.
Like clockwork, that marks the sixth consecutive quarter of adding 30 million paid subscriptions. After ramping up the rate of paid subscription additions through most of 2017, the rate of quarterly additions has stayed flat.
Even if you assume no acceleration or deceleration in the rate of adding new subscriptions, Apple should be able to add another 120 million paid subscriptions over the next four quarters, which would put it over 500 million at the end of Q1 2020.
Can paid subscription growth accelerate?
Whether that rate changes is a little less clear. There has been some concern that Netflix's (NFLX -1.03%) recent decision to kill iTunes billing would hurt Apple's services growth, particularly as the entertainment category is extremely important and Netflix was previously the top-grossing app in that category.
Morgan Stanley analyst Katy Huberty put out a research note last month documenting deceleration of revenue growth in the entertainment category, citing data from mobile analytics firm Sensor Tower. This was the first quarter after Netflix fully stopped offering in-app subscriptions to new and returning customers in December. Fortunately, that didn't seem to derail Apple's paid subscription growth meaningfully.
Maestri again highlighted how diversified the services business is, noting that the largest third-party subscription app accounts for just 0.3% of total services revenue, a statistic he shared in January.
Furthermore, Apple unveiled four new services in March, of which only one has launched so far (Apple News+). Apple Card, Apple Arcade, and Apple TV+ will all debut later this year. Those forthcoming services have considerably more potential than Apple News+, a magazine subscription service.
Gaming and entertainment are among the most popular and lucrative categories, and Apple Arcade and Apple TV+ represent the company's first direct forays into those segments. Even without knowing key details such as pricing or availability, the slew of new services represent an opportunity to accelerate the rate of paid subscription growth. Depending on launch timing, it wouldn't even be unreasonable to think that Apple could hit 500 million by the end of 2019.