Apple Has Finally Found Its Next Big Product (Premium)

For years, Apple, its fans, and Wall Street have struggled to find the firm's next big product after the iPhone. Well, it's here. And, no, it's not the iPad, the Apple Watch, or any other hardware product.

Instead, the clue to Apple's biggest and most sustainable future growth business can be found in the financial results data that accompanied its recent quarterly earnings report, as well as in a post-earnings conference call with analysts.

I am referring, of course, to Apple's services business.

"Services revenue hit an all-time quarterly record of $7.3 billion, representing 22 percent growth over last year," Apple CEO Tim Cook said during that post-earnings conference call. "We continue to see great performance all around the world, with double-digit growth in each of our geographic segments."

So let's put this in perspective.

Apple's services business is "the size of a Fortune 100 company," as Mr. Cook put it. At $7.3 billion, that business is as big, or bigger, than any of Microsoft's primary businesses. For example, Microsoft's Intelligent Cloud business delivered $7.4 billion in revenues in the same quarter. And it's growth rate, at 11 percent, was half that of Apple's services business.

Or how about Microsoft's so-called "commercial cloud" pseudo-business, which aggregates the revenues from various cloud-based solutions from different actual Microsoft businesses? That delivered $4.7 billion in revenues in that quarter, up 56 percent year-over-year. I've often cited this part of Microsoft as the software giant's future. And it's about half the size of Apple's services business.

Oops.

Put another way, Apple's $7.3 billion in services revenues in bigger than the revenues from Amazon Web Services ($3.66 billion) and Netflix ($2.64 billion) combined. Also, services is growing at a much faster clip than any of Apple's other businesses. It won't be long before services is Apple's second-biggest business after the iPhone.

This week, Apple CFO Luca Maestri provided some more color to the strength of the firm's services business:

The App Store is the biggest part of this business. "The App Store was a major driver of [Service's financial] performance [in the quarter]," he said. "It generates nearly twice the revenue of Google Play." This is huge because the App Store works across all of Apple's core devices---iPhone, iPad, and Apple Watch---and, in a way, with the Mac as well. There is a huge audience of billions of people out there with Apple devices. "On a year-over-year basis, the number of accounts that are actually transacting and paying on the App Store is growing very, very well," he added.

Apple Music and iCloud are growing rapidly. "Revenue from our Apple Music streaming service and from iCloud storage also grew very strongly," he said. "And across all of our Services offerings, the number of paid subscriptions reached over 185 million, an increase of almost 20 million in the last 90 days alone." I'...