Apple still makes the bulk of its money selling iPhones. But in trying to show investors that it can thrive in high-margin software, the company has built a services unit that's now approaching $40 billion in annual revenue. But it's leaving money on the table by failing to embrace the biggest trend in the software industry: subscriptions
Music, apps, cloud storage, customer support and Apple Pay are all popular services among Apple's vast population of gadget owners. They've helped the services business grow 53 percent in the past two years, while iPhone sales have only increased 16 percent over that stretch.
Apple's focus on software should entice investors, who have shown a willingness to pay higher sales multiples for fast-growing companies like Salesforce, Workday and ServiceNow in enterprise software and Netflix and Spotify in the consumer world. But unlike those companies and older software vendors such as Adobe and Microsoft, which have migrated to the cloud in recent years, Apple hasn't fully embraced subscription software.
Apple has a suite of products called Pro Apps, used primarily by audio and visual professionals, that customers buy and download onto their local hard drives — the way software worked in the pre-cloud days. Users of Mac computers go to the App Store to purchase Final Cut Pro, Logic Pro X, Motion, Compressor and MainStage 3. They each have separate prices — Final Cut Pro X costs $300 — and the whole package costs $630.
Those are all products that Apple could conceivably host in the cloud and charge monthly subscriptions to use (Apple Music, for example, costs $10 a month for unlimited streaming). The model, known in the technology world as software as a service, provides less revenue up front but potentially much more over time if customers see the value and renew annually. Last year Apple said Final Cut Pro X had 2 million users, but none are paying for the video production software on a recurring basis.