By Tina Lux-Boim, President & CEO, MMI
Apple’s most recent earnings statement revealed that services are now a major driver of revenue for the tech giant, providing yet another example of the shift toward service-based earnings in the technology sector. In its third-quarter earnings report, Apple revealed that the services business is now the brand’s primary driver for revenue growth. In Q3 (Apple’s fiscal year ends in September), iPhone sales represented approximately 55 percent of total revenue, the lowest in the last 12 quarters. On the other hand, Apple’s services business, comprised of Apple Music, iCloud, Apple Pay and other offerings, yielded $7 billion, a year-over-year increase of almost 22 percent.
The shift demonstrates Apple’s response to a new marketplace reality in which customers are no longer obsessed with marginal device improvements. In essence, hardware can no longer be relied upon as the primary source of revenue growth. And Apple isn’t alone: According to a July report from Gartner, worldwide PC shipments in Q2 2017 totaled 61.1 million units, a 4.3 percent drop from Q2 2016 and the 11th straight quarter of declining PC shipments. In fact, shipments in the second quarter of this year reached the lowest point since 2007.
Across the industry, Cisco, HPE, IBM, Lenovo and many other technology companies are focusing on subscription and support services, maintenance contracts and renewals to capture revenue in the face of declining or cyclical device and PC sales. Partners are all about MRR. In some cases, services now represent recurring, contract-based annuity streams that can be forecast to shareholders three to five years in advance, creating financial incentives for tech companies to prioritize services revenue growth. MRR translates to higher valuations.
IT manufacturers and their resellers need to recognize and harness the continued shift to services.
From a business standpoint, the shift to services makes sense. The commoditization of hardware has lowered margins on devices, and the cloud makes services more attractive because they provide recurring revenue streams with little to no manufacturing costs.
But while subscriptions and services present important revenue opportunities, there are several issues IT manufacturers and their resellers need to be aware of as they navigate the transition.
1. Service revenue is all about renewals. Loyalty aside, hardware-based revenue models are based on one-time transactions. Even Apple rarely sells customers two iPhones in a year. But in a service revenue model, IT manufacturers must shift to a renewal mindset. Selling the service isn’t enough. To achieve revenue growth, manufacturers have to become adept at automating renewal processes. If you have Apple Music, when’s the last time you had to manually renew your plan?
In the software field, many traditional manufacturers have transitioned to the SaaS model to better serve customers that don’t require an on-premises solution or in-house IT personnel. The most successful SaaS providers are the ones that protect recurring revenue streams by …