Apple: Cloud Shines Light in Financial Gloom

Mitch Wagner

Cloud services were a bright spot in a gloomy quarterly financial report for Apple this week.

Apple Inc. (Nasdaq: AAPL) saw its first quarterly decline in revenue in 13 years in results reported Tuesday, driven by slumping iPhone sales.

But the cloud provided a spot of good news in the gloom.

Apple overall revenue declined 13% year-over-year to $50 billion for the second quarter 2016. iPhone sales were down 18%, to $32.9 billion; iPad down 19% to $4.4 billion; and Mac down 9% to $5.1 billion.

But take a look at the "Services" category, which includes the App Store and Apple Music -- it's up 20%, to nearly $6 billion. It's the second-largest revenue-generating category of the quarter, beating the iPad, Mac and "Other Products," which includes the Apple TV, Apple Watch, Beats and accessories.

How big is Apple's cloud business? Its cloud revenue beat Facebook 's overall $5.8 billion quarterly revenue for Q4 2015. It's almost as big as Microsoft Corp. (Nasdaq: MSFT)'s "intelligent cloud" business, which includes traditional server software as well as Azure, and which weighed in at $6.1 billion last quarter. (See Facebook Wins Big in Q4 and Microsoft: Cloud Growth Fails to Offset Overall Revenue Decline.)

That's not to say that Apple has a cloud business the way, say, Microsoft does. Microsoft will sell you Azure services no matter what device you're using. Apple's hardware is the foundation of its business, including cloud services. And Apple crossed the 1 billion devices sold threshold earlier this year, CEO Tim Cook noted on the company earnings call Tuesday. (Read the transcript of the call here.)

Apple isn't like other 21st Century IT companies. It's a throwback to the integrated IT companies of the 1980s, like IBM and Digital Equipment. Apple doesn't just sell you a device or a service; it sells an ecosystem.

In other words, Apple is similar to every other business in every other industry – whether you're selling iPhones, hotel rooms or insurance, you're in the cloud business now.

— Mitch Wagner, Follow me on TwitterVisit my LinkedIn profile, West Coast Bureau Chief, Light Reading.

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5/10/2016 | 2:44:19 PM
Re: The ecosystem paradox
It will be interesting to see how the Apple cloud profits progress in coming quarters and where their strategies might be modified over time as device sales either increase or founder.
5/3/2016 | 11:01:09 AM
Re: The ecosystem paradox
With a billion devices out there, Apple should be able to improve those cloud profits as time goes on. Even with device sales, slowing it would seem that those iTunes sales and other profit centers will continue to climb anyway.
Mitch Wagner
Mitch Wagner
4/27/2016 | 5:56:58 PM
Re: The ecosystem paradox
Interestingly, I've seen analysis indicating that the slump comes from a sales spike in the year-ago quarter, that in fact iPhone sales are in line with the trend since 2007, when the product was first introduced. 

Of course Wall Street, which demands growth, might not give a darn about that, and could punish Apple in the long term. 

4/27/2016 | 5:07:51 PM
The ecosystem paradox
Mitch -- Your take on Apple's ecosystem strategy is spot on, and it also shows why any prolonged slump in its device sales is going to be a problem. The end-user device is the beating heart of this ecosystem. Without gadget expansion, Apple's ancillary offerings (the cloud stuff) will only go so far.
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