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Financial News

Sep 17, 2019

Behind Apple’s Push to Sell Services

By Team Stash

Companies like Apple may have to change direction to keep growing.

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Most people know Apple for its slick laptops, smartphones, and watches.

But the Cupertino, California tech giant is also transforming into a service business. Last week, during Apple’s annual new product show, it displayed its new iPhones and iMacs, but it also discussed details about something else that shows how the company may be changing. It talked about its new offering Apple TV Plus—a streaming service that will compete with Netflix, Disney and others, for $5 a month.

Only a few weeks prior to that, it launched a credit card, in partnership with the bank Goldman Sachs. Apple TV and the company’s new credit card will also join iTunes and Apple Pay as services the company offers.

So why does Apple seem to be venturing into territory that’s further and further away from its computers, laptops, and the other hardware it has traditionally sold?

We’ll explain why companies sometimes decide to change course and try something new.

More about Apple

Along with companies like Dell and Microsoft, Apple has helped define the personal computing market—we’re talking desktops, laptops, and related gadgets.

But sales for many of Apple’s items have leveled off recently, particularly for iPhones, which make up nearly half of Apple’s annual sales. Why? There are plenty of competitors offering products that are a bit cheaper than Apple’s $1,000 iPhone. Also, the market may be reaching a saturation point, meaning all the people who will buy iPhones already have them.

On the other hand, services represent a growing part of Apple’s sales. We’ve written before about how to research a company’s stock, through something called a 10-Q or a 10-k. These are earnings reports a company is required to file with the Securities and Exchange Commission, detailing facts about its financial operations.

Example: In Apple’s most recent 10-Q for the second quarter, 2019 (you can find that here), you’ll see at the very top that it breaks down its sales by products, and then by services. Notice how the amount of revenue for its product sales decreases, while revenue for its services business continues to increase quarter over quarter.

What’s a service

In the business world, a service is a transaction where no physical goods are exchanged. In other words, you don’t wind up with a physical product, the way you would if you purchased a car or computer.

Services can include things small things like:

  • Having your car repaired
  • Going out to eat in a restaurant
  • Having your house cleaned
  • Going to an accountant

But they can also include entire industries such as:

  • Computer network hosting
  • Video streaming services
  • Utilities

Why do companies change direction?

It’s actually a common occurrence for companies to change directions. Sometimes they have to, for a variety of reasons. Markets become mature—which means essentially the company has sold just about all the products to consumers that anyone wants. So they have to develop new lines of business to stay profitable.

Services can be an obvious choice, since companies may have already developed much of the technology they need while pursuing other business lines, including computer and distribution networks, as well as products.

Another example is Amazon, which began to branch out from online book sales to all e-commerce sales in the early 2000s. As it grew and developed into the largest e-commerce company in the U.S. based on sales, it started offering other services, such as web hosting and streaming video. It also branched out into devices including the Kindle, Echo, and Chrome tablets.

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