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Five ways Apple's iPhone 6, iWatch launches may transform its business model

Apple's iPhone 6 and wearable preview is likely to be the beginning of a series of product launches that could lead to more software and services growth.

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Apple is building a giant white cube outside of the Flint Center in Cupertino, California Image: James Martin/CNET

Apple's launch of the larger screen iPhone 6 and preview of iWatch or a similar wearable will aim to silence critics who contend the company's innovation has peaked, but may also transform the business model.

While Apple's powwow Tuesday will kick off the company's "Fab Fall" series of product launches — 4.7-inch and 5.5-inch large screen iPhone 6 devices, a wearable and talk about the company's technology direction going forward. The sequel from Apple will revolve around the iPad and what analysts hope is an iTV.

The launches will set Apple up for the next few years and could fundamentally transform how the company makes money. Today, Apple is mostly a hardware company — even though app and music revenue tops $10 billion annually. In the future, Apple will have to be more about software and services.

With more than half its revenue deriving from the iPhone, Apple will have to diversify elsewhere. This product cycle from Apple will go along way to diversifying sales.

Here's a look at five ways Apple's model could shift:

Larger screen devices, more valuable apps? Larger iPhones could result in more high-value applications as well as revenue growth for Apple's software business. Should Apple's selection of apps move into analytics, enterprise and running companies revenue will follow.

Macquarie analyst Ben Schachter said:

"With the iPhone 6’s bigger screens, faster speeds, NFC, and better sensors, it is rational to expect significantly more utility from a broad variety of apps. And given that Apple was able to sell $10 billion of apps in 2013, 75 percent plus of which were relatively simple games on relatively small screens, we think the new hardware and sensors will enable much better software and services that should drive growth."

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Apple will garner more revenue from the enterprise. Another thread to the launch of big-screen iPhone 6 devices is Apple's partnership with IBM. As noted previously, larger iPhone screens are going to appeal to the enterprise. Over time, Apple's business could look as strong as BlackBerry's did at its peak.

 

E-commerce fees. The biggest takeaway from the wearable Apple is expected to launch is that it'll enable NFC payments and mobile payments. The general idea is that Apple's wearable will resemble Disney's MagicBand where you swipe and pay. If reports are true, Apple has lined up credit card partners and will serve as a wallet juggernaut. Schachter noted that Amazon just recently passed Apple in revenue per month. Although the comparison isn't perfect, Apple can move the needle simply by adding more e-commerce to its mix via its wearable and iBeacon technology. As eBay's PayPal has proven, collecting fees on transactions is a fine business.

Cloud services. Apple has the developer and hardware platform to roll out a bevy of services beyond what it has today — notably iCloud. To move the needle here, Apple has to reverse a slide in software and services revenue per user. Schachter noted that software and services revenue per user fell from about $5 for the quarter ending March 31, 2011 to $2 for the June quarter this year. Part of the fall could be attributed to iTunes, but a lot of it is the fact Apple hasn't worked the cloud services angle like Google, Amazon and Microsoft have. 

Ads. Apple has reportedly clued in fashion mavens about its wearable plans. Apple has also started an ad business, but hasn't really pushed it. Coverage from desktops to tablets to phablets to phones to TVs and watches should enable Apple to offer programs that would appeal to marketers. Amazon has quietly become a big advertising player. Any ability to move the needle on advertising could diversify Apple's revenue base.