Get the latest tech news How to check Is Temu legit? How to delete trackers
NEWS
Apple Inc

Where your iTunes dollars go: Apple's services is worth $23B

Jefferson Graham
USA TODAY

LOS ANGELES — Many consumers awake to a daily nag on their iPhone warning them they're about to run out of online storage. It’s time to open up the wallet and upgrade, Apple tells us.

Those that heed the call can pony up for one of several tiered iCloud plans, which start at 99 cents monthly.

Apple's iTunes

It turns out, all those pennies — and the Apple marketing machine that keeps the reminders humming — add up.

Even as iPhone, Mac and overall sales fell in the recent quarter, the bright spot was Apple’s “services” division, which is software-related, including iTunes, iCloud, the App Store, Apple Pay and Apple Music.

Apple bulls should hope a car is a ways off

The iPhone is still Apple’s biggest source of revenue, making up $24 billion of the $42.4 billion for the third fiscal 2016 quarter. But quietly, services has nabbed second place, rising 19% to nearly $6 billion in sales, followed by Mac computers at $5.2 billion, the iPad at $4.9 billion and “other” (which includes Apple TV and the Apple Watch) at $2.2 billion.

Services in the latest quarter represented 14% of Apple’s total revenue, up from 10% a year ago. That's at a company dominated by one product, the iPhone, which has represented about two-thirds of revenues.

Services is such a huge chunk of sales, CEO Tim Cook said he expected the division to “be the size of a Fortune 100 company next year,” in a call with analysts.

In the last 12 months, services has generated $23 billion in revenue.

Apple's Cook talks China, Pokemon, acquisitions: live blog recap

For Apple Pay, which allows you to pay for goods at the point of sale via the smartphone, Cook said:  "the growth is astronomical, but the base is very small."

In the current Apple universe, many are starting to ask if smartphones, and one particular model, have peaked. Sales have fallen for two straight quarters, and folks aren’t upgrading every two years, like clockwork, as they used to. They're holding onto their devices longer.

Apple shares overcome iPhone drop to rally on outlook

But they’re also using them more than ever, for hours and hours a day. Which is great news for Apple.

“Once you have an iPhone, you are hooked on the Apple ecosystem,” with iTunes and the App Store, most notably, says Gene Munster, an analyst with Piper Jaffray. “Consumers are shifting their spend away from places like cable TV and desktop games to iTunes media and apps.”

Apple on Wednesday said it had sold its one-billionth iPhone. With a universe that large, "when people are tied to an Apple ecosystem where everything works together, they are more likely to buy more things that are part of Apple services," says analyst Tim Bajarin, of Creative Strategies.

The rise and fall of the DVD rental business means higher profits for Apple. Instead of running out to get an evening’s entertainment at a neighborhood shop, folks turn to iTunes to see TV shows and movies on their iPhones, iPads, Mac computers and Apple TV.

They buy apps (mostly mobile games) at the App Store, where Cook said some 2 million apps were now available. The recent summer smash, Pokémon Go,has been downloaded about 75 million times in just three weeks, and while it’s a free app, there are in-app purchases, like many games, so look to Apple to profit from Pokémon.

Catching monsters a service? Not for you and me. But for Apple, a highly profitable one.

Follow USA TODAY tech columnist and #TalkingTech host Jefferson Graham on Twitter, @jeffersongraham, and listen to the podcast daily on Stitcher and iTunes. 

Featured Weekly Ad