If services are its future, then Apple is kind of screwed

Were last quarter’s terrible results a blip, or a trend?

That’s the question that Apple and Apple stockholders will be asking themselves after a quarter that saw a year-on-year drop in iPhone sales for the first time in Apple’s history. Some have suggested that the numbers mean Apple’s reaching a hardware saturation point in many of its key markets, and while it can expect to keep selling iPhones to its existing fans, it may not be able to attract enough new ones to power the kind of explosive revenue growth we’ve seen in the past. At least not through hardware sales.

Of course, as income levels rise, there’s still a lot of room for Apple’s hardware business to grow in emerging markets. But in more established ones, the company is betting on software services like iCloud, Apple Music, and Apple Pay to squeeze more money out of its existing users.

It’s clear that this is important to Apple. In the most recent earnings call, Apple CFO Luca Maestri said that although Services represent a relatively small portion of Apple’s total revenue right now, the profitability there is “significantly higher” than the company average. And its services businesses, while starting from much lower base points than its hardware sales, are mostly still showing strong growth, reflected in the 20 percent year-on-year growth rate Apple announced for its services revenue despite shrinking revenue in most other areas of its business.

So, services is the future, or at least a big part of it, for Apple in markets where its hardware is firmly established and – at least maybe – near the saturation point. What’s the problem?

Real competition

The biggest problem is that Apple is not the Apple of services.

In hardware – or at least in the all-important smartphone market – it’s hard to deny that Apple is the gold standard. Yes, there are strong competitors like Samsung producing phones that are arguably as good as or even better than Apple’s iPhones. But the iPhone is so established as the leader in this market that it’s the benchmark for virtually all comparison. Even when Android phones are just as good, we talk about them being just as good as an iPhone. Nobody talks about whether the iPhone 7 will be as good as the LG G5 (for example).

Apple doesn’t have this lead in services, though. In fact, it’s generally in the opposite position. In streaming music services, for example, it’s Spotify that is the gold standard, not Apple Music. In epayment, the market leader varies by market, but I’m not sure that Apple Pay holds the pole position anywhere right now.

Against established competitors, continued growth is going to be more expensive and more difficult.

In smartphones, Apple got into the business early and built up such a massive lead that a decade later it’s still feeling the benefits. In services, Apple is mostly coming to the game late, trying to play catchup with established players.

And while Apple’s services offerings are growing, that’s in part because they’re starting from a relatively low base point. In music, for example, Apple Music has around 11 million subscribers, compared to Spotify’s 30 million, and they’re growing at a pretty similar rate. If both companies continue their growth trends, it would take Apple almost 15 years just to catch Spotify, never mind surpassing it.

Apple does have one advantage, in that it can integrate its service offerings into its devices to attempt to push users towards those services. But Apple Music is integrated into iTunes on Mac and mobile, and users are still mostly choosing Spotify.

That isn’t to say that Apple can’t do well in service markets. But it faces a different kind of challenge there. It’s no longer the biggest fish in the ocean, and against established and entrenched competitors, continued growth is likely going to be more expensive and more difficult than Apple is used to from the hardware market.

Regulatory threat

Apple’s just not as good at this

Services may not save you