Apple is the world’s first $3 trillion market value company, and it got there by generating tens of billions of dollars in revenue per quarter. Historically, that revenue has primarily come from hardware sales, but more recently the company’s coffers are being filled by non-hardware products, and thanks to DOJ’s ongoing antitrust trial against Google, we now know a lot more about the impressive non-hardware revenue Apple generates.
For the first 30 years of its existence, Apple was officially called Apple Computer, Inc. The name was appropriate because for those three decades, Apple earned nearly all its revenue from one type of product: computers. But when Apple founder and CEO Steve Jobs took the stage at the Macworld Expo in January 2007 to introduce the iPhone, he also famously announced the company was dropping “Computer” from its name. The reason? “The Mac, iPod, Apple TV, and iPhone. Only one of those is a computer. So we’re changing the name,” Jobs said.
In the years since, the iPhone has become the main revenue driver for Apple, though the company still makes tens of billions per year on its other hardware products: the Mac, Apple Watch, iPad, and AirPods. But that’s not to say the company hasn’t also embraced and excelled in non-hardware revenue streams: Indeed, Apple’s so-called Services division has also become a huge moneymaker.
In Apple’s Q4 2023, which just ended, the company made $22.3 billion in services and $67.1 billion in “products” (ie: hardware). In other words, nearly 25% of the money Apple made in the quarter didn’t come from hardware. And in all of Apple’s fiscal 2023, “services” accounted for $85.2 billion in revenue—the largest revenue category behind the iPhone, which generated $200 billion in sales. That means Apple’s services now generate 42.6% of what the company’s flagship iPhone generates on an annual basis.
But just what do these non-hardware services consist of? A quick perusal of Apple’s latest 10-K SEC filing tells us what Apple considers services:
- Advertising: Apple sells ads inside of its apps, such as News, the App Store, and Stocks. It generates revenue from the sale of those ads.
- AppleCare: The company’s optional extended warranties on its products is another service the company offers.
- Cloud Services: This consists mainly of iCloud Plus subscriptions, which gives iCloud users more online storage and security options.
- Digital Content: Apple subscription services that aren’t iCloud Plus fall under “digital content.” This includes Apple Music, Apple News Plus, Apple TV Plus, and Apple Fitness Plus. It also includes Apple’s up-to-30% cut from apps sold on its App Stores, its cut of in-app purchases, and its cut of media purchases from its movies, TV shows, and iTunes music stores.
- Payment services: Every time you use Apple Pay, Apple earns money on the transaction. The company also offers its Apple Card credit card, which earns Apple money.
Since Apple doesn’t break down its services revenue by individual services, we can’t be sure how much Apple is making from, say, Apple Music subscriptions or its advertising sales, but Apple is also likely not listing everything it groups into its Services category, either.
In addition to the above, Apple also generates non-hardware revenue from licensing agreements and things called “information services agreements” (ISA). And Apple has one very important ISA, which may account for as much as $20 billion of its annual services revenue: its search deal with Google.
Since 2002, the Google search engine has been the default search engine on Apple devices. Google pays Apple for the privilege. And since Apple devices—especially its iPhones—are insanely popular, the more people who use Apple devices, the more people who potentially use Google search, making it a win-win for both companies.
Just how much Google pays Apple to remain the default search engine on Apple devices is a closely guarded secret—and one that is the focus of the Justice Department’s antitrust trial against the search giant. It’s thought that Google probably paid Apple around a billion dollars a year in 2002 when the ISA started. But since that time, the annual amount Apple makes from its Google ISA is thought to have skyrocketed.
Last month, The Register reported that analysts at Bernstein estimated Google paid Apple between $18 billion and $20 billion a year. If that’s accurate and if Apple includes the Google revenue in its Services category, that means nearly a quarter of all its Services revenue comes from Google cutting Apple a big check.
And this week, Google’s main economics expert told the court further information that lends credence to Bernstein’s sky-high estimates. During his testimony, University of Chicago professor Kevin Murphy revealed that Google pays Apple 36% of the ad revenue it makes from searches done via Apple’s Safari web browser. As Bloomberg’s Leah Nylen wrote, “John Schmidtlein, Google’s main litigator, visibly cringed when Murphy said the number, which was supposed to remain confidential.”
Apple also has ISAs with Microsoft (for the Bing search engine) and Mozilla (for the Firefox search engine), yet neither of those agreements would generate revenue anywhere near what Apple earns from Google. And if Google loses the trial, it’s possible it may be forced to cease its ISA with Apple—cutting the company off from billions of service dollars every year.
Still, even without Google’s revenue, Apple’s Services offerings now represent a huge portion of the annual revenue Apple generates and shows that the company is not a hardware-dependant enterprise any longer.
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