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Apple’s great hope

What's next now that iPhone sales growth has slowed down?

Apple’s future lies in one important number from its earnings report

Apple is known for selling mountains of iPhones, iPads, iPods, and Mac computers, but when it reports earnings on Tuesday all eyes will be on a number that means much more to the future of the world’s largest company: services.

The key to Apple’s future is selling services to people who already own iPads, Apple Watches, Mac computers, or Apple TVs, such as software from the App Store, music from iTunes, storage from iCloud, and ultimately, we expect, TV — all paid for with Apple Pay, of course.

With the smartphone-upgrade cycle lengthening, the years of breakneck sales growth are over. Apple simply cannot rely on selling more iPhones for growth. As tech analyst Ben Thompson argues, the “‘low-hanging fruit’ — new markets, new carriers, new screen sizes — is gone.”

“The real competition for Apple are the still very good iPhones their customers already have,” he said. “To that end, making more and more money off of those pre-existing customers is the natural next step in Apple’s growth.”

The market already knows iPhone sales will be down in 2016, and so will revenue, compared to last year. But that’s not such a big deal. The holiday quarter is what really matters for iPhone sales, and this year Samsung’s best phone, the Galaxy Note 7, won’t even be on the market.

But beyond the rollout of the iPhone 7 and the Apple Watch 2, Apple has a dearth of new products on sale in the quarter. The company is expected to roll out updated Mac computers later in the week, and while some people have been waiting a long time for updated computers from Apple, it’s not really a computer company anymore.

That brings us back to services, poised to keep growing in a world where most people who want a smartphone already have one. This business has grown 20 percent in each of the last two quarters, making it Apple’s second-biggest revenue area after the iPhone.

Includes iTunes, App Store, Apple Care, iCloud, Services Parts & Licensing

The services division kicked into overdrive during the last financial year, and in July, during an earnings call with analysts, CEO Tim Cook said that division alone was on track to generate revenue in 2017 on par with a Fortune 100 company.

To give you an indication of how big this is for Apple, in the first three months of this year, Apple’s services revenue was bigger than Facebook’s entire revenue for the period.

So why is the services revenue growing so fast? Apple now has an install base in excess of 1 billion devices (that’s iPhones, iPads, Macs, iPods, Apple TVs, and Apple Watches), and Apple says its customers are spending more now on apps and services than ever before.

If Apple shows sustained growth of 20 percent in its services division on Tuesday, it will help allay any fears shareholders may have about declining revenues in the company’s hardware business — at least until 2017, when the iPhone 8 is expected to arrive.

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