The fact that Apple’s App Store did record-breaking business over the holidays is hardly a shocker.
Lots of people get new phones and tablets for Christmas, so it stands to reason they’d load them up right away. But analysts say that even with that expectation, Apple’s record $240 million in App Store purchases on New Year’s Day is noteworthy.
Apple’s services business, a big chunk of which comes from iTunes and the App Store, today represents 13 percent of Apple’s revenue and is the only major segment of the company’s business that grew last quarter.
For the year, Apple said it paid out $20 billion to developers, up more than 40 percent from 2015. And if it paid out that much, it’s fair to say its own take was also up significantly. (Apple typically gets 30 percent of the revenue generated by app sales, but it can vary for subscriptions and other types of sales.)
Analyst Gene Munster, who is particularly bullish on Apple’s opportunity in services, says he thinks that segment could become 30 percent of Apple’s business in five years’ time.
Of course, there are two ways that Apple’s services business could grow to become a bigger part of Apple’s business, only one of which is actually good news.
If hardware sales grow and the services business grows even faster, that’s obviously great for Apple. The other way, which isn’t so hot for Apple, is if services only make up a larger percentage of Apple’s revenue because hardware sales continue to stagnate.
For his part, Munster said he’s betting Apple’s hardware-related revenue will be flat or up slightly over the next five years, with services revenue continuing its rapid growth.
“The 2016 App Store numbers and the New Year’s Day App Store sales underscore how quickly Apple is becoming a services business,” said Munster, who just left his longtime gig at Piper Jaffray to form his own investment firm, Loup Ventures. “We believe our previous expectation of 15 percent year-over-year services revenue growth in 2017 is conservative. The actual number may be closer to 20 percent.”
Even if Munster is right, Apple’s services business still pales in comparison to the iPhone. Investors are probably more concerned about whether Apple has a plan to boost phone sales or enter some big new category than they are about another great year for the App Store.