“Apple Inc is betting on services such as app downloads and music subscriptions to help drive growth as the cell phone market matures, but the company faces tough competitors and potentially low profit margins in some of its target areas,” Stephen Nellis reports for Reuters. “A 31 percent increase in services revenue to $9.2 billion was a bright spot in earnings reported on Tuesday, lifting overall gross margins as well as sales, the company said. Apple subscribers, who include customers paying for third-party apps on iPhones, rose 100 million in the last year to 270 million. But profitability varies widely among service offerings, and some businesses appear to have lower profit margins than the 38.3 percent company-wide figure Apple reported.”

“The App Store and iCloud storage are similar to high-margin software businesses while entertainment, such as Apple Music and a nascent video business, are similar to lower-margin media businesses,” Nellis reports. “‘Some of these services are for sure going to have much lower margins’ than Apple’s core hardware business, said Bob O’Donnell of TECHnalysis Research.”

“The App Store is the largest component of the services segment, [CFO Luca] Maestri told Reuters. Apple receives 30 percent of the price of one-time app purchases and purchases made within apps, such as items in video games, and 15 percent of App Store subscriptions to services like Netflix Inc after a year. That is a high-margin business, but the company has been in it for a decade,” Nellis reports. “Entertainment, though, is a tougher business where Apple may have to spend substantially to compete with entrenched rivals. ‘Look at what Netflix and Amazon are doing. Those guys are spending hundreds of millions if not billions of dollars on content,’ O’Donnell said.”

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MacDailyNews Take: Oh, no, woe is Apple! How will the company ever compete? Where will Cupertino find hundreds of millions if not billions of dollars? All is lost.

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