How Apple Inc. Hopes to Grow Its Services Business to $50 Billion by 2020

By Motley Fool Staff Markets Fool.com

Services continue to be an increasingly important segment for Apple (NASDAQ: AAPL), in part due to the recurring nature of the revenue it produces. In this segment fromIndustry Focus: Tech, the cast discusses how Apple plans to double the size of this business over the next four years.

Continue Reading Below

A full transcript follows the video.

10 stocks we like better than Apple
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Continue Reading Below

This podcast was recorded on Feb. 3, 2017.

Dylan Lewis: One of the segmentsthat is gaining more and moreattention from analysts andthe market in general isApple's services segment. This is the iTunes Store, the App Store, Apple Pay, Apple Music, TV App Store, etc. Services, this time, came in at $7.2 billion, which is roughly 9% of revenue. But,perhaps more impressively, it was up 18% year over year. It seems like the company and the Street are both giving this a little bit more emphasis as time goes on.

Evan Niu:Yeah. Andthat was a quarterly record,one of those records they set this quarter. If you look at it nowon a trailing 12-month basis, services has now crossed $25 billion, in terms of thesize of the business. So this is a huge business already. Here's the crazy thing: They'revery ambitiously saying they're hoping to double the services business within four years. That's saying, "Wethink we can make this a $50 billionbusiness by 2020." Which ispretty ambitious. As far as how they'll get there,they highlighted a couple things. First of all, now, there are150 million paid subscriptions that are beingautomatically billed,recurring subscriptions. That includes Apple's services as well as third-party services. Butthat's the total number that is being billed through iTunes and the App Store right now. That's a pretty big number. They do expect that to keep growing. That's a pretty big base of regular subscriptions of various types ofservices that they sell. Transaction volumes are going up, theinstalled base is growing. There's really all these different aspects of it. Theyeven mentioned -- this is kind of surprising -- the iCloud storage business isgrowing quite a bit. I would never have thought it would be a growth driver. But,basically, all these different aspects are really putting up good growth, and combined, they're really bullish about this going forward. It's a pretty ambitious goal there.

Lewis:Yeah. Looking at the inputs of whatmakes up that services revenue,there's momentum on both sides. Not only is theinstalled base is getting larger -- so, thenumber of people that are actually somehow transactingwith the services segment --they indicated in the call that that'sincreasing in the strong double digits. Also, the ARPU (average revenue per user) for each paying customer is increasing inthe double digits. So it's not that one side of that equation is really crushing it and the other one is stagnating. Both sides are performing well. And I think that's what you want to see.

Niu:Yeah. Andthey also had mentioned the music business,which had been declining for quite some time, formany years. Before Apple got into thestreaming side, when it was all the downloadbusiness for music, as people shifted toward streaming, that business was shrinking. Now, we'reback to this inflection point where music is growing again. If you include both download and streaming -- so bothiTunes plus Apple Music --if you combine them,the music business as a whole is now growing again. That's always nice to see, particularly as the shift towardstreaming continues, more and more people arewilling to pay. The industry itselfreally likes the shift to paid streaming versus ad-supported streaming. AndApple is a big proponent in that transition. That's also another good sign. They are really helping the music industrygrow as a whole, as well as their cut of the whole music business growing again.

Lewis:Andyou have to like that, considering that they are,what some people might argue,kind of a late entrant into streaming music. You already hadSpotifywith tens of millions of people using it,and you might have wondered what adoption might have looked like for Apple Music and the streaming service. Butresults seem to be pretty good so far.

Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.