Tuesday 26 March 2019 1:36 pmMarkets Talk

Apple's big ecosystem play

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Doubts and unanswered questions aplenty following last night’s glitzy event, but make no mistake this was another big step in the pivot towards making Apple more of a services business.

You would call this an ecosystem play, with new services designed to strengthen the bonds between consumers and the brand. Services revenues have soared lately and are more sustainable than relying on hardware sales – building out this ecosystem is crucial to the brand being able to continue to deliver thus growth.

In terms of the credit card, this doesn’t seem like ‘The Big Push’ into finance – more like a Goldman card with Apple branding and a couple of perks.

The streaming service is more interesting. Hard to describe it as a ‘Netflix killer’ yet as there was a lack of detail on content and pricing, yet it does point to the directional shift we’ve been expecting. Whilst there a clear incumbent leader in this space, and competition is intensifying – Disney is set to launch its streaming service shortly om Apr 11th – there is little argument that Apple has the deep pockets and cache as a brand to be a contender. Moreover while playing catch up, Apple has an obvious advantage in that there is existing market penetration with an ecosystem of 1.4bn devices.

Apple Arcade is arguably the most interesting development, potentially moving Apple into the gaming space to a degree it’s not been capable of before. This is a still growing market globally and one that should offer a new and sustainable revenue stream for Apple.

In terms of the subscription news, it probably says more about the fight for reader eyes that existing publishers have than anything else.

Taken together, while there are plenty of questions for Apple, it’s a clear marker of where the business focus is going to be in the coming years. The fact there were maybe more questions than answers left investors a little less confident, with shares sliding 1.2 per cent on the day to $188.74. Having rallied hard post the Jan 2nd profits warning, this was a buy the rumour, sell the fact type trade. But by Tuesday the shares were back above $190 – don't stand in the way of the Apple steamroller.

Services are where it's at for Apple now. With the smartphone market saturated and it becoming increasingly difficult to deliver the 'next big thing', sustainable Services will be crucial.

Last quarter Services revenues jumped 19 per cent to a record $10.9bn as the total installed base hit 1.4bn devices. The real bright spot for investors, as we had suggested in our previews, were the Services margins. Higher margin services revenues that are more reliable are critical to uprating Apple stock and the omens are positive. Services margins, reported for the first time, came in at 62.8 per cent, well ahead of expectations and representing very solid year-over-year growth from 58.3 per cent in Q1 2018.