Aiming to beef up its recurring revenue stream, Apple Inc. (AAPL) is gearing up to launch a paid subscription service centered around Texture, the magazine app company it recently purchased.
Bloomberg, citing people familiar with the matter, reported the Cupertino, California-based technology company plans to integrate Texture into Apple News and roll out a subscription service. Users of Texture pay $9.99 a month to access more than 200 magazines. Bloomberg reported that shortly after Apple completed the acquisition, Apple reduced the staff by around twenty. Apple is integrating the remaining Texture team into the Apple News team, which is working on developing the premium subscription service. The service, along with an upgraded Apple News App is slated to launch next year. People familiar with the matter told Bloomberg that a cut of the subscription revenue will be paid to the magazine publishers that participate in the service. (See also: Apple Is a Safe Bet Amid ‘Market Turmoil’: BofA.)
While Apple had a paid content service dubbed Newsstand, users could only buy subscriptions on an individual basis instead of purchasing access to a variety of different publications. Apple News took a similar approach but the iPhone maker is now betting that this new subscription model could increase use of Apple News and generate a new revenue stream similar to Apple Music, which charges $9.99 a month. Apple Music, noted Bloomberg, has more than 40 million paying customers.
For Apple, services revenue is becoming an important area as demand for iPhones starts to slow. Sales from the services category increased 23% to $30 billion last year. Bloomberg noted that company executives have a goal of hitting $50 billion in services revenue by 2021. That business encompasses Apple Music, iCloud, Apple Pay, App Store, and iTunes. (See more: Apple's 'Other' Sales to Hit $22B in 2019: Analyst.)
But it's not just Apple that is optimistic about its ability to grow that segment of its business. In a recent research report, Morgan Stanley analyst Katy Huberty argued investors shouldn’t worry about declining iPhone demand because services compensate for the shortfall in revenues. “Over the last five years, the vast majority (86%) of Apple’s 8% annual revenue growth was driven by iPhone sales,” the analyst wrote in the note in late March. “But as replacement cycles extend further and device installed base growth slows to single digits (from 14% over the last two years), it is through monetization of Apple’s Services business that we see the company still generating mid-single-digit revenue growth.” Huberty predicted that the proportion of revenue generated by the iPhone will drop from 86% to 22% over the next five years. However, services sales will increase to 56% from 23%.