Apple says gaming slowdown and App Store changes hurt services growth

Apple reported a dip in its services revenue during its fiscal third quarter, marking the first time the segment missed expectations despite a robust performance in hardware sales. The tech giant announced $30.74 billion in services revenue, falling short of the $31.22 billion anticipated by Wall Street analysts. This shortfall came amid broader challenges, including a weakened performance in China and a global slowdown in mobile gaming. The company's stock dropped nearly 4% following the earnings report. The decline in services revenue was attributed to multiple factors, according to Apple CFO Kevan Parekh. One key element was the impact of a slowdown in mobile gaming, which significantly affected the App Store, a cornerstone of Apple's services division. Additionally, recent changes to the App Store's business model in certain regions, notably the United States, played a role. These changes stem from a court order requiring Apple to permit app developers to handle customer payments outside the App Store, thereby reducing Apple's ability to collect commissions on such transactions. Although Apple did not quantify the exact effect of this change on its revenue, it mentioned that the matter would soon be addressed by the Supreme Court. Foreign exchange fluctuations were another major contributor to the revenue shortfall. Apple indicated that currency movements had a substantial impact on its financial results, particularly affecting its international operations. Furthermore, the company faced a challenging comparison against previous quarters, when it benefited from the success of its "F1" theatrical release, which generated considerable revenue. Despite these challenges, Apple highlighted positive developments within its services division. The App Store achieved a revenue record for the June quarter, although this figure included contributions from Apple Ads, which have grown in significance. Apple Ads have recently expanded to include Apple Maps, indicating a strategic shift towards diversifying its advertising portfolio. Parekh emphasized the continued growth of Apple's services business, noting that the segment set an all-time revenue record in developed markets and a June quarter record in emerging markets. He added that the vast majority of markets tracked by Apple showed double-digit revenue growth. The company also reported that both transacting and paid accounts reached new all-time highs in the quarter, with double-digit growth observed in emerging markets. Specific segments within the services division performed exceptionally well. Apple Ads, the App Store, AppleCare, Apple Music, and Apple TV all recorded June quarter records. Cloud and payment services also hit all-time highs. Apple TV, in particular, saw its viewership reach an all-time high during the quarter. Looking ahead, Apple outlined potential new revenue streams for its services division. These include the newly launched Creator Studio subscriptions and upcoming bill-splitting features in Apple Cash, which aim to enhance customer engagement with Apple's payments ecosystem. The recent launch of the Apple Upgrade program, in collaboration with Klarna, could further boost services revenue by encouraging more consumers to purchase Apple devices, potentially leading to increased adoption of Apple's services.