Apple Inc. (AAPL) Ecosystem Coming Of Age: $16 Billion Run-Rate

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Apple Inc. (AAPL)In spite of slowing growth rates in most product categories along with declining margins, Apple Inc. (NASDAQ:AAPL) still showed some bright spots in some aspects of its business in its latest earnings report. The company’s tablet sales along with service revenues and retail seems to be doing very well. Going forward these three segments should hold up well as Apple Inc. (NASDAQ:AAPL) enters a maturity phase as a major dividend payer.

1. Rapid consumer adoption of the iPad

Apple Inc. (NASDAQ:AAPL)’s competition in tablet markets where it is a clear leader is a lot lower compared to the smartphone business. The 19.5 million iPads the company sold in the past quarter led to revenues of $8.7 billion. And the Average Selling Price (ASP) trickled down to $449 reflecting a small sequential quarter-over-quarter decline of ~$18 per unit. This was driven by the rapid consumer adoption of the iPad mini which comes at a lower price point for the company. The product was very well received as Apple couldn’t meet the demands for the iPad Mini in the previous quarter.

Apple Inc. (NASDAQ:AAPL) continues to hold more than 39% of tablet market share in Q1 CY2013, according to IDC. However, competition is expected to heat up even more as other firms enter the market with newer devices. Samsung held the second place in the tablet marketplace with 17.9% market share thanks to Google Inc (NASDAQ:GOOG)‘s Android. And Nexus 7 maker, ASUS and, Inc. (NASDAQ:AMZN) round off the top 4 players in the most recent quarter. Surprisingly,, Inc. (NASDAQ:AMZN)’s tablet shipments couldn’t cross the 2 million mark, very likely due to the seasonal impacts of the first quarter.

Exhibit: Top 5 Tablet Vendors, Shipments, and Market Share
Vendor 1Q13 Unit Shipments 1Q13 Market Share 1Q12 Unit Shipments 1Q12 Market Share Year-over-Year Growth
1. Apple 19.5 39.6% 11.8 58.1% 65.3%
2. Samsung 8.8 17.9% 2.3 11.3% 282.6%
3. ASUS 2.7 5.5% 0.6 3.1% 350.0%
4. Inc. 1.8 3.7% 0.7 3.6% 157.1%
5. Microsoft 0.9 1.8% 0 N/A N/A
Others 15.5 31.5% 4.9 24.1% 216.3%
Total 49.2 100.0% 20.3 100.0% 142.4%
Source: IDC -May 2013

In spite of losing market share, the growth of the tablet market will substantially benefit Apple as the company ramps up its product lines with more lower priced tablets like the iPad Mini, and its unit shipments is more than 2 times the shipments of Samsung.

2. Ecosystem is coming of age; $16 billion run-rate

Apple Inc. (NASDAQ:AAPL)’s industry leading ecosystem continues to perform well with the presence of the App Store in 155 countries, and iTunes in 119 countries along with more than 300 million users on the iCloud. iTunes is crucial for long-term customer satisfaction and retention. Additionally, it attracts developers

App downloads on its massive ecosystem surpassed the 45 billion mark translating into revenues of more than $9 billion for app developers. And 74% of all app sales worldwide in the March quarter were through the App Store, according to Canalys. In addition to being a major hub for apps, the ecosystem now contains more than 35 million songs and 60,000 movie titles on demand and 1.75 million iBooks and 850,000 iOS apps, along with 350,000 apps for iPad only.

Apple Inc. (NASDAQ:AAPL)’s installed user base of more than 500 million users on iTunes has led to service sales revenue of more than $4.1 billion in the quarter. The service sales run rate of more than $16.4 billion can grow a lot more down the road, as more iOS devices are sold. Of the $4.1 billion, iTunes alone contributed $2.4 billion which represents a growth rate of 28% year-over-year, thanks to more movies, apps and music downloads.

The strong build-up of its ecosystem enhances the unique value proposition for customers, as their switching costs surge with more content in Apple’s ecosystem. This strengthens the firm’s moat. Apple’s revenues from the ecosystem made up only 9% of total sales, but in the future, there is substantial room for growth as more iOS devices are sold along with the addition of more digital content and apps in the ecosystem.

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