Apple reported a knockout quarter Tuesday, showing growth in iPhone sales and improved numbers in China just a year after sales there fell off a cliff.
But the most interesting story at Apple has nothing to do with the iPhone and China. It's all about the massive success of the company's wearables products, which include the Apple Watch and AirPods. Apple may like to focus on its digital services business as its next area of growth, but wearables are turning into the sleeper hit at the company.
And Apple isn't finished either. There were plenty of promising signs in Apple's report that wearable products are poised to have another stellar 2020.
Let's take a look at what we learned about Apple's incredible wearables on Tuesday:
The massive success of wearables signals a shift in the story around Apple.
While the company has been touting its services business over the last few years, its new products in the category — the Apple TV+ streaming service, the Apple News+ subscription news service and the Apple Arcade gaming service — are all too young to have a material impact on the services business. Apple even said last year it doesn't expect a material impact from Apple TV+, and on Tuesday Cook said the company is evaluating Apple TV+ based on the number of subscribers it has, not how much money it generates. Subscriptions are a longer-term play for Apple as it builds out its content offerings. For now, it can build up its subscriber base by offering cheap or free plans, with the hope of converting those customers to paid users in the future.
In fact, Apple's services fell slightly short of Wall Street's expectations Tuesday, reporting $12.7 billion in revenue versus the $13.07 billion consensus estimates, according to Refinitiv. That revenue mostly comes from App Store sales, iCloud storage subscriptions and the hefty fees Google pays Apple to be the default search engine on Apple devices. It's unlikely Apple's newest content subscription products are making a real impact so far.
Meanwhile, Apple's wearables business looks a lot like the iPhone business did when Cook took over as CEO in 2011. Back then, the iPhone had a long runway ahead to grow as Apple cut more deals with carriers to sell the iPhone around the globe. Now that iPhone sales have stabilized and there are at least 900 million in use, there's a massive market for Apple's latest wearable devices.
Apple also has an advantage over the competition. Microsoft, Google, Amazon, Samsung and others have all taken stabs at wearables with middling success. Last year, Google bought Apple's flailing smartwatch rival Fitbit for $2.1 billion in an effort to boost its poor-performing Android Wear platform. Microsoft delayed its AirPods competitor to this year after announcing it last fall. And Google's new wireless earbuds won't launch until later this year either.
AirPods and the Apple Watch have set the standard for wearables that no competitor has been able to crack yet, much like it took iPhone rivals several years to catch up with their own smartphones. Apple keeps showing us that it can leverage its huge base of iPhone users into new wearables customers. And because those products are tied to the iPhone and other Apple gadgets, they help keep customers locked in to the Apple ecosystem.
Apple has found its next act in hardware with wearables. The iPhone is still the most important product at the company, but the Watch and AirPods are poised to usher in a new era of growth.