Apple Services Through 2022. We have written about the need for Apple to reinvent itself in the next decade through services and AR. The Services reinvention is already underway, accounting for 11.6% of revenue in 2016, and closer to 18% of profits. Today we are rolling out our 2022 Services model, and estimate services revenue will account for 20% of Apple’s sales in five years, 30% of profits and growing at 15% annually. For comparison, we estimate Apple’s hardware sales will be growing at about 5% in 2022. This translates to $60B in 2022 Services revenue up from our estimate of $30B in 2017. This growth will in part be maintained by App Store revenue from Apple’s advancement of augmented reality (AR) that will be the company’s next major development platform. We expect AR will be a key feature in the upcoming iPhone X release (more on that here), which will slowly build developer enthusiasm for AR apps.

Beyond 2022. Apple should easily hit its stated goal that its Services business will become a Fortune 100 company sometime in 2017. Thinking about Services beyond 2022, we believe Services will have a steady 10% growth, and account for three quarters of Apple’s overall growth. This will be driven primarily by the App Store, Apple Music + Content, with all three areas strongly benefitting from the addition of AR.

App Store. By 2022, we expect App Store revenue to account for 44% of Services revenue and be growing at 14% annually, due to Apple’s continued leverage of revenue share with developers. Apple will continue to see App Store revenue account for a major portion of total Services revenue. The emphasis on AR capabilities in the iPhone X will be the next foundation for developers, creating an even playing field for creation and distribution of AR content. It’s worth noting that we don’t expect an acceleration of App Store growth from AR; rather, developers will view adoption of AR as fundamental to a mobile experience, and a necessity to maintain existing users and compete for new ones. Our App Store growth goes from 29% in 2017 to 14% in 2022.

Apple Music + Content. By 2022, we expect Apple Music + Content revenue to account for 23% of Services revenue, growing at 30% annually. We remain optimistic on the future of Apple Music. Despite a rough start, Apple has steadily built its music subscriber base to roughly 25m (as of Feb. 2017). By the end of 2017/early 2018, we expect Apple to begin offering additional video content as well, including its own original content (more on that here). While this pursuit adds Apple to an already tight freeway of content producers and providers like Netflix and Amazon, Apple’s combination of AR and VR related hardware and content could offer some differentiation.

Growth in this segment is ultimately dependent on Apple’s investment in the quantity and quality of its content, en route to its internal goal of 100 million Apple Music + Content subscribers by 2022. Apple is well on its way to achieving this target with roughly 25m music-only subscribers to date, while the preponderance of future subscriber adds will need to come from a hybrid music/content offering.

iCloud. By 2022, we expect iCloud revenue to account for 13% of Services revenue, growing at 15% annually. Apple’s iCloud business will continue to scale with continued growth in devices, users, and devices per user. In addition, natural storage pricing declines will continue to attract more users to the service.

iTunes. By 2022, we expect iTunes revenue to account for 8% of Services revenue, declining 10% annually.  iTunes revenue will continue to naturally decline as music and video streaming subscription services grow. Roughly half of iTunes revenue is from music purchases, while the other half is from video content. As more video is added to Apple Music/TV, iTunes revenue declines will accelerate.

Licensing. By 2022, we expect Licensing revenue to account for 6% of Services revenue, growing at 12% annually. Apple derives most of its licensing revenue from Google, as Google pays to have its search engine as the default in Safari. In addition, Apple licenses many of its patents to other smartphone manufacturers, such as Samsung.  This revenue should continue to grow steadily in the future as other parties will continue to rely on Apple’s platform and patented technology.

Apple Care. By 2022, we expect Apple Care revenue to account for 5% of Services revenue, growing at 10% annually. Apple Care will remain an important contributor to Services revenue.  Apple Care has benefited from the launch of the iPhone upgrade program. Apple Care subscriptions should continue to scale commensurate with increasing iPhone ASPs and popularity of upgrading more frequently.

Apple Pay. By 2022, we expect Apple Pay revenue to account for 1% of Services revenue, growing at 40% annually. Despite its fractional contribution, Apple has seen a lot of success with the Apple Pay platform in just the past year. User growth has tripled to nearly 12m monthly users, while transaction volumes increased by approximately 500%. This is clear evidence of growing user adoption of Apple Pay, as well as growing contentment with the service as a frequent and preferred payment method. See our recent analysis of Apple’s progress with Apple Pay here.

Apple’s adoption of AR will add an entirely new dimension to Apple pay. For example, iPhone X owners can eventually use their phones to view a product, get pricing comparisons, or even complete an order. Imagine going into a store and seeing the perfect shirt, only to realize that the size you need is not in stock. At this point, a shopper has to track down a sales associate, explain what product and size they want, and then fill out shipping and payment information at a register. With AR, a user could simply capture the item, and automatically navigate to product checkout on their device. Users will already have shipping and payment information stored in Apple Pay, simplifying the process and removing any need for interaction with a sales associate – a rather seamless transaction for the consumer.