Services have become a bigger and bigger piece of Apple's (AAPL -0.57%) business over the years. With a greater focus on the segment, Apple has recently expanded it to include music, video, gaming, fitness, and financial services to go along with its App Store, AppleCare, and iCloud products. Last year, the company generated $53.8 billion in revenue with an average gross margin twice as wide as its hardware business.
Apple will continue to look for ways to expand the services business in 2021. Here are three areas the company may explore.
Image source: Apple.
Premium podcasts
Apple's default podcast app is still the most popular way to listen to podcasts. But Spotify (SPOT -1.49%) is gaining ground on Apple, stealing away listeners and signing top-tier podcast creators to exclusive deals. Spotify previously said its podcast strategy is leading to greater conversion from free to paid listeners. Analysts recently cast doubt on that thesis, and Spotify's reporting change last year (allocating podcast content costs into the ad-supported segment) suggests it may only impact free listening.
Apple is reportedly planning to launch a podcast subscription product this year, according to tech news site The Information.
It's hard to see Apple having much success launching premium podcasts as a stand-alone service. Spotify is reportedly exploring that idea, but hasn't launched a podcast-only product. Indeed, podcasts are more of a complementary service that could fit in with a couple of other Apple services.
Apple could add exclusive podcasts to Apple Music much the same way Spotify offers them. That could help retain subscribers and keep them from testing the waters with Spotify.
Additionally, podcasts could work to bolster Apple News. Some sources in Apple News allow you to listen to stories instead of reading them. Podcasts could be a further extension of the service.
New financial services
Apple already offers a handful of financial services focused primarily on payments. 2021 could see the company expand its services to include those found in other digital wallet apps like Square's (SQ -1.97%) Cash App.
Apple could also add investment accounts like those found in Cash App or Robinhood. Analysts at Loup Ventures point out that the Stocks app "is already a go-to app for many investors, and there's more the company could do." They also suggest Apple could offer robo-advisory services like Wealthfront.
While Apple could generate revenue directly from brokerage services, the real value would come from drawing more users into its financial services ecosystem. Square says it generates three to four times the gross profit from Cash App users who use multiple services in the app. So, if brokerage services can drive more Apple Card signups, it could be a very profitable endeavor for Apple.
The iPhone as a service
Apple currently offers the iPhone Upgrade Program. For a monthly fee, you get AppleCare+ and you can upgrade your iPhone every 12 months. It also now offers an Apple One subscription service, which bundles up to six Apple services for a monthly fee, and notably doesn't include AppleCare.
There's an opportunity here for Apple to bundle the iPhone Upgrade Program with Apple One, so customers pay just one monthly bill to Apple and get practically everything the company has to offer.
While the iPhone already has strong retention numbers, the phone upgrade cycle has become much more extended over the last few years. Pushing more consumers to the subscription model, where they can upgrade every year, will help cut down the average lifespan of the iPhone and spur additional sales of Apple's most important product.
Adding a top tier to Apple One that includes the iPhone, AppleCare+, and perhaps additional exclusive perks or offers, could produce a meaningful boost to revenue if it drives more frequent device upgrades.
The services business will continue to change
Apple may not launch any of the above services, but investors should expect the services business to remain a focus of management and undergo further changes in 2021. The fast-growing segment is a key driver of Apple's bottom line, but it's bolstered by existing stalwart services like the App Store. Incremental changes this year with services like those mentioned above won't have a significant impact in 2021, but they could become long-term drivers of the broader Apple ecosystem, which would result in the FAANG stock price moving higher.
