"Advertising emerged as the largest Services driver in FY21." — Analyst Katy Huberty
From a note to Morgan Stanley clients that landed on my desktop Tuesday:
Apple's 10-K indicates that the three largest drivers of Services net sales growth in FY21 were 1) advertising, 2) App Store, and 3) cloud services, which compares to 1) App Store, 2) advertising, and 3) cloud services in FY20.
Stronger advertising Services revenue in FY21 compared to FY20 isn't surprising given that advertising budgets pulled back in 2020 but recovered sharply in 2021 as the economy recovered. 'Advertising' primarily includes Google's licensing payments to Apple, as well as revenue from Apple's App Store search ad business.
We believe the majority of the Google payment is variable, meaning it is largely tied to Google's mobile search revenue, which accelerated in 2021.
Apple's advertising business is still small; thus, it was likely only a minor contributor to the stronger performance in FY21.
My take: Small compared to Google and Facebook, for sure. But Services generated more than $68 billion in revenue for Apple, and advertising -- Google's and Apple's -- was the largest contributor.