Most of the acceleration in Services, he says, came from licensing payments from Google, which are up for renegotiation.
From a note to clients by Bernstein’s Toni Sacconaghi that landed in my inbox Tuesday:
First half Services growth … accelerated vs. last year: the business grew 24% in 1H 18, vs. only 18% in 1H 17. How did this happen? Our analysis suggests that Licensing (primarily TAC [traffic acquisition costs] payments from Google) may have accounted for essentially all of Services’ ~600 bps acceleration in growth. We estimate that Google could make TAC payments to Apple of $4B to $5B this year, which we see as a double-edged sword.
Apple’s recent disclosures offer some new insights into its “subscription” businesses – for instance, we now estimate that iCloud subscriptions will generate $3.5B to $4B in revenues for FY18, or 10% of total Services revenue. Moreover, we believe that total subscription services (Music, iCloud, Apple Care, and in-app subscriptions like Netflix) may now be at a~$12B annual run rate.
So what happens to Services going forward? In the near-term, we growth will likely decelerate in FY Q3 and FY Q4, in part due to tougher comps and as the Licensing business laps its contract renegotiation with Google. That said, we do feel incrementally better about the longer-term prospects of the business. While we still doubt that Services can sustainably grow at 20%+ without new services offerings, we now see Apple as likely to hit its bogey of doubling Services to $49B by the end of FY20.
My take: When Sacconaghi is done whizzing on Apple, he acknowledges that its Services business is doing just fine.