Subscription-based services offer companies a steady and recurring revenue stream, making them less volatile than hardware sales. Unlike one-time purchases, subscriptions generate predictable income, enhancing financial stability and fostering long-term customer engagement.
Apple Inc AAPL exemplifies this trend through its thriving Services segment, which encompasses the App Store—where it earns commissions from digital sales—along with Apple Music, iCloud, Apple TV+ and Apple Arcade & Fitness+, catering to music, cloud storage, streaming, gaming and fitness needs. This segment has shown significant growth, increasing from $78.1 billion in 2022 to $96.2 billion in 2024, reflecting a 13% year-over-year increase. Notably, Apple’s Services segment boasts high gross margins of 73.9%, exceeding the 37.2% margins of its hardware business, making it a crucial driver of the company’s overall profitability.
Apple's success in services reflects a broader industry trend where subscription-based businesses—like Netflix Inc. NFLX and Sony Group Corporation SONY—are thriving. These companies generate recurring revenues, ensuring financial stability and long-term customer engagement.
NFLX: Leading the Subscription Streaming Market
Netflix remains the dominant player in subscription-based streaming, with more than 250 million subscribers. The company reported strong financials for the fourth quarter of 2024, with $10.25 billion in revenues, marking 16% year-over-year growth, and earnings per share of $4.27. Unlike Apple TV+, which is still building its subscriber base, Netflix is already highly profitable and continues expanding its global content portfolio.
Apple Connection
Netflix benefits from Apple’s App Store ecosystem, where iOS users can easily access its app. While Netflix has moved away from AAPL’s in-app payment system to avoid commission fees, the platform still attracts new users via Apple's devices.
SONY: Subscription Growth Through Gaming & Entertainment
Sony’s PlayStation ecosystem is another major player in the subscription model. PlayStation Plus, its premium gaming subscription service, saw a 20% revenue increase in the third quarter of the fiscal year 2024 due to price adjustments and a shift toward higher-tier subscriptions. Sony also benefits from digital game sales and its cloud gaming expansion, which allows PS Plus Premium members to stream more than 120 PS5 titles without a console.
Apple Connection
Sony collaborates with Apple in multiple ways. PlayStation controllers are compatible with iOS devices, and Apple TV+ licenses some content from Sony Pictures. These integrations help expand Sony’s ecosystem while benefiting Apple’s services.
Netflix and Sony are deeply connected to Apple's growth in services through multiple integrations and market dynamics. Apple’s App Store and iOS ecosystem provide a seamless gateway for Netflix and PlayStation Plus to acquire and retain subscribers, expanding their reach among Apple users. While Apple TV+ competes with Netflix in streaming, both companies drive the industry forward by encouraging consumers to embrace paid digital entertainment. Additionally, Sony’s PlayStation 5 integrates with Apple services like Apple Music and Apple TV+, highlighting cross-platform collaboration that benefits all three companies in the subscription economy.
Subscription-based services remain a high-margin and high-growth business model. Companies like Netflix, carrying a Zacks Rank #2 (Buy), and Sony, which sports a Zacks Rank #1 (Strong Buy), stand to benefit as consumers continue shifting toward digital entertainment and cloud-based services. You can see the complete list of today’s Zacks #1 Rank stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
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