Apple's $85 Billion Services Business Is Less Profitable Than You Think

's (NASDAQ: AAPL) services segment -- home to the App Store, Apple Pay, music and video streaming, iCloud, and anything else that's not hardware -- generated $85.2 billion of revenue in fiscal 2023, which ended on Sept. 30. Apple now generates more revenue from services than other product category except the iPhone.

This services revenue appears lucrative for Apple. While sales of products produced a gross margin of 36.5% in fiscal 2023, sales of services generated a gross margin of 70.8%. A dollar of additional services revenue is worth more to Apple's bottom line than a dollar of additional revenue from anything else the company sells.

There's one important thing to know about Apple's services segment: It includes payments received from Alphabet for making Google the default search engine on Apple's devices. Google paid $26.3 billion in 2021 to various companies in deals to make its search engine the default in mobile and web browsers. Apple almost certainly receives the lion's share of these payments given the company's massive device install base.

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Source Fool.com