The Industry

Apple’s Profit Machine

The App Store has quietly gotten as big as the global box office.

The Apple App Store icon with a red notification bubble filled with four dollar signs.
Photo illustration by Natalie Matthews-Ramo. Image by Apple.

For years, the iPhone has been Apple’s cash cow, propelling the company to record revenues and transforming it into one of the most valuable companies in the world. Apple’s financial landscape may be evolving, though. Now that most Americans own a smartphone, there are few internal markets left to conquer, and those of us with smartphones are choosing to hold onto them longer. With that in mind, Apple’s latest model, the iPhone X, has reportedly seen weaker sales than expected. According to at least one Wall Street research firm, the number of iPhone owners planning to upgrade to the next model is at a historical low, and recent reports suggest Apple has scaled back iPhone production by half.

Luckily, Apple’s not purely a hardware manufacturer. It built a second revenue stream straight into the iPhone experience: the App Store. While iPhone interest may be waning, increased App Store purchasing may be making up for it. The App Store seems to have had its best year ever. Over the holiday season, App Store users spent $890 million on downloads and in-app purchases, with a record $300 million spent this New Year’s Day alone. For 2017 as a whole, App Store revenue increased 35 percent over 2016, to a total of roughly $38.5 billion, according to information from the data insights firm Sensor Tower. At its current trajectory, App Store revenue will eclipse global box office revenue this year.

The App Store is part of what Apple calls its services business, a segment that also counts iTunes Store sales, iCloud storage purchases, and Apple Music subscriptions among its profits, as well as dollars spent on Apple Pay and Apple Care. Historically, its services segment only accounted for a small percentage of Apple’s total cash influx. But as of November, when Apple shared its most recent quarterly earnings report, services was up 34 percent from the quarter prior, reaching a new record of $8.5 billion in revenue for the period. (Apple’s total revenue for the quarter was $52.6 billion.) It’s one of Apple’s fastest expanding segments and accounted for a significant portion of the company’s revenue growth last year. It raked in more money than the iPad and Apple’s “other” category, which includes products like the Apple Watch, Apple TV, and Beats headphones.

Unlike the iPhone, which burst onto the scene and quickly began transforming Apple’s revenue landscape, the App Store has been more of a sleeper success story. In its first few years, App Store popularity—in terms of purchases and profits—grew slowly. After its debut in 2008, it took five years for annual revenue to reach $10 billion, a total it then doubled only two years later. Now the App Store is poised to double its 2015 revenues by some time in 2018.

The App Store’s rapid recent growth stems from a combination of things. Apple needed market penetration, which is why in the store’s first few years it grew slowly as Apple was building its audience of device owners. Then, there was the issue of paying for apps. Having forked up $600 or more for their iPhone, many iOS users were loath to spend additional money on iOS apps. Many developers made their apps free or adopted a “freemium” model, making it a free download but adding in-app purchases for access to additional features or game levels. While some developers are critical of the way Apple embraced freemium apps, it’s clearly paid off for the company: Instead of a one-time download of $4 game, we’re downloading the app for free and spending $40 on in-app purchases—unless you’ve got phenomenal self-restraint and an eagle eye on your finances, those in-app purchases can sneakily add up. Similarly, with the rise of streaming music and video, subscription-based models have grown in popularity—and if purchased through the App Store, Apple gets a cut.

Now, Apple owns a sizable share of the smartphone space. In the U.S. alone, there are nearly 90 million iPhone users—more than 40 percent of the smartphone market. If Apple’s iPhone sales are starting to fall flat—something we’ll learn for sure when its next earnings report is released Thursday—its challenge will be to retain that user base and further capitalize on the promise of the App Store and other digital services like Apple Pay and Apple Music. Apple’s got other means of making money off of hardware, like the upcoming launch of its HomePod smart speaker. But in a world that’s become increasingly mobile, it’s things like the App Store that will continue to drive Apple’s success.