Apple's next big thing could be content

Tools

Apple relies heavily on hardware today to drive it's high earnings, but as this quarter's earnings proved, relying on hardware sales alone might not be sustainable--and the future for Apple could be in content.

For starters, let's look at Apple's numbers. They sold a record number of iPhones and iPads for a quarter. They had record earnings, but overall the year over year profit was flat at $13 billion. That's not terrible of course, but it shows in spite of selling more and more product, Apple is finding it harder to grow in hardware.

This breakdown is even starker when you look at a recent article by Ed Bott on ZDNet where he uses pie charts based on recent earnings reports to illustrate how Apple, Google and Microsoft make their money. As you can clearly see if you click through, Apple makes 72 percent of its money selling the iPhone and the iPad, the vast majority coming from the iPhone.

For Apple, the iPhone has been quite a ride. It transformed the company so much that even selling a record number of devices for a quarter wasn't enough to satisfy Wall Street, which apparently expected even more. Apple is getting squeezed when it comes to taking profits out of the iPhone and that is only likely to continue unabated in the future.

Which brings us to an interesting tweet from Horace Dediu, who is principal at Asymco:

iTunes/Services/Software revenues were about half of Google's ad revenues in 2013.

— Horace Dediu (@asymco) February 7, 2014

To give you a sense of what that means, Google made over $50 billion in revenue from ads in 2013. That means that Apple made around $25 billion from content and services. Dediu estimates there was significant growth from third party content, video, apps and services. However it breaks down, if his numbers are correct, it's a fairly significant chunk of change and it could represent a way out of the hardware box Apple finds itself in.

As Dediu wrote in his post, "Although iTunes/Software/Services are not usually included in a "sum-of-the-parts" total contributing to Apple's overall enterprise value, the scale of volume and value of transactions is becoming harder to ignore."

Apple has always been about a smooth integration of hardware, software and services. Sometimes, as with apps and the iPhone, it works great. Other times, as with iTunes, it has been kind of a bloated mess, but Apple was the first company to figure out how to monetize MP3s in a big way with iPod. It continued that with apps and other content in the iOS ecosystem, and it needs to find a way to develop its content side even more.

That's because content revenue probably isn't going to get squeezed like hardware. And if Apple can find a way to shift some of that hardware revenue from the iPhone and iPad to content, it could stabilize its revenue stream over time, even as hardware markets saturate or commoditize.

Whatever Apple does, and they've done pretty well without my advice to this point, they should be thinking about content because it can give them a steady income and could prove once and for all that the old chestnut about content is true. It really is king. - Ron

Filed Under