Author: Security – Computerworld

IT budgets unlikely to suffer full effect of Trump’s 10% tariff on Chinese goods

February 3, 2025 /

US President Donald J. Trump’s tariffs on Chinese-made computing equipment are slated to go into effect tonight — but at a much lower rate than he initially threatened.

The 10% tariff will do much less damage than the 100% version that had been touted — and there are other factors that will mitigate its impact on enterprise IT budgets.

Ranjit Atwal , Gartner senior director analyst, has been modelling the likely evolution of PC prices this year. Even without the tariffs, he was forecasting average PC prices would rise by around 4% because of inflation and a move to AI PCs; those models typically include more expensive processors with neural processing units (NPUs) and a minimum of 16GB of memory to support generative AI (genAI) models running locally.

Effect of the tariffs on enterprise PC prices

The planned tariff is unlikely to add a full 10% to prices on top of the inflationary increase, he said. The supply chain is likely to absorb some of the increase in the form of narrower margins and still more by offering new PCs with lower specifications at lower price points. Without those kinds of measures, some have forecast demand for laptops in the US could fall by as much as 68%.

Overall, Atwal said, he expects average PC prices to rise by between 9% and 9.5% this year after taking into account inflation, changes in typical specifications, and the new tariffs.

Timing of the increases

Goods imported into the US or released from bonded warehouses there before 12:01 a.m. ET on Feb. 4 — or loaded aboard a ship bound for the US before 12:01 a.m. ET on Feb. 1, are exempt from the tariff. But anything arriving or shipping from China after those dates will be hit by the new tariff, according to Trump’s Executive Order and a fact sheet published by the White House.

Inventory already in the sales channel in the US is unaffected, but price increases on PCs will likely soon flow through to enterprises.

That’s because PC inventories are low at the moment, as sales have been slow and risk-averse resellers are reluctant to hold large stocks in case the introduction of newer models makes them obsolete, according to Atwal. He estimated there are perhaps 30 days’ PC inventory in the US channel.

Small share of IT spend

When the tariffs do start hitting IT equipment deliveries, the effect on already-stretched enterprise IT budgets might not be as pronounced because companies are now spending less on hardware and more on software and services. 

“Three quarters of enterprise and government tech spend in the US comes from software and IT services,” said Michael O’Grady, a forecast analyst at Forrester Research.

Computer and communication equipment together make up just 13% of US technology spending, he said, “so although tariffs will impact the price of imported goods, most of the software and IT services spend would not come from China.”

Consequences for the rest of the world, too

While Trump can only impose tariffs on goods imported into the US, his order could have repercussions on IT equipment prices globally, too.

China produces about three-quarters of the world’s PCs, Atwal said, and there is little room for vendors to move production capacity away from China to avoid the tariffs — at least in the short term. “There has been a steady shift to other countries, but trying to rebuild that on the same scale somewhere else has not been straightforward,” he said. 

There won’t necessarily be bargains available from vendors already making PCs and components in countries not subject to the tariffs, as the temptation for them will be to increase their prices across the board, just behind those hit with tariffs. 

The US represents about 27% of the global PC market by units sold, Atwal said, so if demand here falls due to the tariffs, vendors will be looking to make up lost revenue from sales in other countries. How exactly they do that is one of the many unknowns: Will they raise prices to lift revenue, or cut them to boost sales volumes?

The tariffs Trump has imposed on Chinese, Mexican, and Canadian products could upset global trade ba;ances in other ways, too, Atwal suggested: The move could cause currency swings that will influence the cost of imported goods, including IT equipment in other countries.

With so many variables, he said, “We’re calculating this through. It’s not a straightforward exercise.”

IT budgets unlikely to suffer full effect of Trump’s 10% tariff on Chinese goods

February 3, 2025 /

US President Donald J. Trump’s tariffs on Chinese-made computing equipment are slated to go into effect tonight — but at a much lower rate than he initially threatened.

The 10% tariff will do much less damage than the 100% version that had been touted — and there are other factors that will mitigate its impact on enterprise IT budgets.

Ranjit Atwal , Gartner senior director analyst, has been modelling the likely evolution of PC prices this year. Even without the tariffs, he was forecasting average PC prices would rise by around 4% because of inflation and a move to AI PCs; those models typically include more expensive processors with neural processing units (NPUs) and a minimum of 16GB of memory to support generative AI (genAI) models running locally.

Effect of the tariffs on enterprise PC prices

The planned tariff is unlikely to add a full 10% to prices on top of the inflationary increase, he said. The supply chain is likely to absorb some of the increase in the form of narrower margins and still more by offering new PCs with lower specifications at lower price points. Without those kinds of measures, some have forecast demand for laptops in the US could fall by as much as 68%.

Overall, Atwal said, he expects average PC prices to rise by between 9% and 9.5% this year after taking into account inflation, changes in typical specifications, and the new tariffs.

Timing of the increases

Goods imported into the US or released from bonded warehouses there before 12:01 a.m. ET on Feb. 4 — or loaded aboard a ship bound for the US before 12:01 a.m. ET on Feb. 1, are exempt from the tariff. But anything arriving or shipping from China after those dates will be hit by the new tariff, according to Trump’s Executive Order and a fact sheet published by the White House.

Inventory already in the sales channel in the US is unaffected, but price increases on PCs will likely soon flow through to enterprises.

That’s because PC inventories are low at the moment, as sales have been slow and risk-averse resellers are reluctant to hold large stocks in case the introduction of newer models makes them obsolete, according to Atwal. He estimated there are perhaps 30 days’ PC inventory in the US channel.

Small share of IT spend

When the tariffs do start hitting IT equipment deliveries, the effect on already-stretched enterprise IT budgets might not be as pronounced because companies are now spending less on hardware and more on software and services. 

“Three quarters of enterprise and government tech spend in the US comes from software and IT services,” said Michael O’Grady, a forecast analyst at Forrester Research.

Computer and communication equipment together make up just 13% of US technology spending, he said, “so although tariffs will impact the price of imported goods, most of the software and IT services spend would not come from China.”

Consequences for the rest of the world, too

While Trump can only impose tariffs on goods imported into the US, his order could have repercussions on IT equipment prices globally, too.

China produces about three-quarters of the world’s PCs, Atwal said, and there is little room for vendors to move production capacity away from China to avoid the tariffs — at least in the short term. “There has been a steady shift to other countries, but trying to rebuild that on the same scale somewhere else has not been straightforward,” he said. 

There won’t necessarily be bargains available from vendors already making PCs and components in countries not subject to the tariffs, as the temptation for them will be to increase their prices across the board, just behind those hit with tariffs. 

The US represents about 27% of the global PC market by units sold, Atwal said, so if demand here falls due to the tariffs, vendors will be looking to make up lost revenue from sales in other countries. How exactly they do that is one of the many unknowns: Will they raise prices to lift revenue, or cut them to boost sales volumes?

The tariffs Trump has imposed on Chinese, Mexican, and Canadian products could upset global trade ba;ances in other ways, too, Atwal suggested: The move could cause currency swings that will influence the cost of imported goods, including IT equipment in other countries.

With so many variables, he said, “We’re calculating this through. It’s not a straightforward exercise.”

Microsoft creates a new department to review how AI affects society

February 3, 2025 /

As part of Microsoft’s big push into AI services, the company has created a new department called the Advanced Planning Unit (APU). Employees of the APU will, among other things, study the effects of AI on society and make recommendations about which products are worth investing resources in.

According to Silicon Angle, Microsoft is now looking for technologists, economists and psychologists who can contribute with their expertise.

Microsoft just last week created another AI department called Core AI — Platform and Tools. Its focus is on developing technical solutions for products such as Github Copilot.

Why second-user smartphone sales are good for Apple

February 3, 2025 /

Apple’s iPhone business isn’t just about new product sales. The second-user and services markets need to be considered, too. Not only does the company command the first market, but it continues to generate healthy services-related revenue on every iPhone used — an estimated $72 per user, per year, according to Morgan Stanley.

There’s little doubt the revenue generated by these services can help the company navigate challenging economic times, and it doesn’t matter if the device itself is first- or second-hand, so long as users sign up for services. 

Gone but not forgotten

To get an idea of the scale of the second-user market, I turned to Circana. In data provided by B-Stock and Samsung Electronics America, I found that 11% of US consumers owned a purchased pre-owned device in 2024 as recession-wary consumers seek to acquire high-quality devices at prices they can afford. 

IDC last year predicted that the used smartphone market will grow 5% a year — a stronger rate of growth than for new devices. It’s a global trend as acceptance of refurbished and second user smartphones grows.

It’s not just about money; consumers are increasingly aware of the link between electronic waste and the environment and choose devices that contribute to a more balanced circular economy.

That means the second-user market is very large. IDC estimates it was worth $72.9 billion in 2023, when more than 195 million used devices shipped. (It predicts 257 mllion used smartphones will ship worldwide by 2028.) That’s all smartphones, with the lion’s share coming from Apple and Samsung, reflecting demand in the new device market.

When it comes to new, “Apple and Samsung remained resilient amid strong flagship demand, reflecting the continued premiumization trend of the market,” said Sanyam Chaurasia, senior analyst at Canalys. “In the high-end, consumers are increasingly opting for the premium version of the flagship series, helped by vendors’ clearer differentiating models within their flagship series in an already price-inelastic segment. In Apple’s case, shipments of the 16 Pro and Pro Max in 2024 were 11% higher than the 15 Pro and Pro Max in 2023, reaching over 55 million units.”

B-Stock indicated that the second-user market also sees customers purchase the best available devices, relying on the growing availability of easy credit to do so.

What do people want?

Craig Feely, Samsung Electronics America’s Head of Certified Renewed/Trade-in, explains that when it comes to the secondary market, consumers care about price, battery life, and the residual value of the device. “Customers are looking more and more for an affordable smartphone option,” he said. “We design our products to be easily repaired or recycled.”

Citing data from Circana, Joe Dube, director for mobile accounts at B-Stock, recently explained that the current market is defined by about 30% of devices sold. That means for every 10 devices, just three reach the second user market.  

“There’s room to grow,” he said. “There’s a ton of devices out there we want to get back into the circular economy.”

The economic benefits of second-user devices are clear. They enable consumers to access premium technology at a fraction of the original price. This affordability extends the lifecycle of devices, making technology accessible to a broader audience and reducing the financial burden on consumers. 

At the Apple Store

It wasn’t terribly long ago that people purchasing new smartphones would primarily do so via their cellular provider. That’s no longer how it is. In the UK, for example, recent CCS Insights data shows more than 20% of UK consumers now purchase directly from Apple or Samsung, up from 5% in 2018. Apple’s online or high-street retail have become more popular destinations for new device purchases than carriers’ own shops.

It now appears that the secondary device market is arcing along the same trajectory, with B-Stock saying people increasingly prefer manufacturer trade-ins to those offered by carriers.

This benefits manufacturers, as it means they can pick up older devices at trade in, then recondition and resell them through their own outlets (such as Apple’s refurbished store) or via partners. That’s a good business, which — put bluntly — means Apple and Samsung get to sell the same device twice, generating additional income as they do.

Another thing that might be of interest to iPhone users: B-Stock’s data suggests November to be the very worst time to sell or trade-in an older iPhone, as that’s when the secondary market value of those devices declines at the steepest rate, 9.8%.  

That decline I think reflects the introduction of new Apple devices, which always dent existing second user prices, not least because so many older devices are traded in at that time.

Why second-user smartphone sales are good for Apple

Not only does the second-user market act as a gateway through which a wider range of customers can begin to use Apple’s platforms, it also provides Apple with a strong opportunity to attract new customers to its high-margin services.

Increasingly, as shoppers choose to trade-in old devices for new, this also gives Apple a chance to renew and resell older iPhones, creating another income stream and adding a few more dollars to the actual revenue it realizes through new device sales.

Later, of course, the customer satisfaction levels Apple’s devices foster also suggests that those coming to its platforms via second-user channels will stay with Apple’s ecosystem in future, purchasing new hardware when they get the chance.

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Technology skills gap plagues industries, and upskilling is a moving target

February 3, 2025 /

Seven out of 10 US organizations are struggling to find skilled workers to fill roles in an ever-evolving digital transformation landscape, and generative AI (genAI) has added to that headache, according to a new ManpowerGroup survey.

The AI skills gap is driven by the rapid growth of AI technologies and the increasing demand for adoption across industries, according to Kelly Stratman, Ernst & Young’s global ecosystem relationships enablement leader.

By 2030, companies are expected to spend $42 billion a year on genAI projects such as chatbots, agents, research, writing, and summarization tools. Currently, 50% of companies with over 5,000 employees use AI, with many more planning to do so.

Meanwhile, job postings for AI skills surged 2,000% in 2024, but education and training in this area haven’t kept pace, according to Stratman.

“As formal education and training in AI skills still lag, it results in a shortage of AI talent that can effectively manage these technologies and demands,” she said. “The AI talent shortage is most prominent among highly technical roles like data scientists/analysts, machine learning engineers, and software developers.”

As AI adoption spreads across industries, the skills gap is growing to include IT, cybersecurity, automation, and more, Stratman pointed out. To address the shortage, organizations must partner with AI leaders to access talent, training, resources, and technology solutions.

AI skills gap

ManpowerGroup

A new survey by training platform Revature showed that 77% of US organizations have been negatively impacted by the IT skills gap, and 56% are choosing upskilling or reskilling as their biggest priority for closing that divide. More than eight in 10 decision makers (84%) are concerned about finding tech talent in 2025, and 57% of respondents said IT staffing companies can’t deliver talent quickly enough.

In Revature’s survey, 29% of respondents ranked AI, genAI, and machine learning as the most important hard skill out of seven capabilities. Data and analytics and cloud computing and infrastructure ranked second and third. 

“While the majority of companies have been affected by the IT skills gap, it’s clear that IT and HR respondents have clear goals and priorities as we head into 2025 — but may not have the tools or the knowledge to execute them effectively,” said Revature COO Tan Moorthy.

Accenture reports that by 2027, 61% of workers globally will need retraining. While 94% are willing to learn new skills, only 5% of organizations are actively reskilling at scale. The demand for skills like AI, machine learning, and cloud computing is growing even faster.

A new report from Forrester Research indicated that in the age of AI, CIOs have to invest in three roles to stay competitive: AI developers and engineers, cloud-related roles, and data-specific roles such as data management and data engineers. The stakes are high. Forrester’s report states that 75% of firms building AI agentic systems in-house will fail, and 25% of AI projects will be stalled by implementation challenges.

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Pluralsight

A new study from freelance employment firm Upwork shows that 80% of executives prioritize skills over degrees when hiring, with half planning to boost freelance hiring this year to address gaps in AI and other skills. However, the skills needed, particularly for AI, are constantly evolving.

“The deepening threat landscape and rapidly evolving high-momentum technologies like AI are forcing organizations to move with lightning speed to fill specific gaps in their job architectures, and too often they are stumbling,” said David Foote, chief analyst at consultancy Foote Partners.

To keep up with the rapidly changing landscape, Gartner suggests that organizations invest in agile learning for tech teams. “In the context of today’s AI-fueled accelerated disruption, many business leaders feel learning is too slow to respond to the volume, variety and velocity of skills needs,” said Chantal Steen, a senior director in Gartner’s HR practice. “Learning and development must become more agile to respond to changes faster and deliver learning more rapidly and more cost effectively.” 

Studies from staffing firm ManpowerGroup, hiring platform Indeed, and Deloitte consulting show that tech hiring will focus on candidates with flexible skills to meet evolving demands. “Employers know a skilled and adaptable workforce is key to navigating transformation, and many are prioritizing hiring and retaining people with in-demand flexible skills that can flex to where demand sits,” said Jonas Prising, ManpowerGroup chair and CEO.

Another wrinkle? Many organizations don’t have a clear idea of what skills their employees have.

Online learning platform Pluralsight recently surveyed 1,200 executives and IT professionals to explore AI’s impact and how organizations can prepare. The study showed that while AI adoption is speeding up, most organizations don’t know what AI skills their employees have or have a plan to upskill them. And with 81% of IT professionals stating they can leverage AI in their roles but only 12% reporting significant experience working with AI, it’s evident there’s a disconnect.

Last year, Accenture launched LearnVantage, a platform that enables organizations to discover what tech gaps they have and where to find online learning platforms to upskill employees. A recent partnership with startup Workera has provided Accenture with a worker skills evaluation platform that can be used by both employers and employees to measure their current skills status.

Kishore Durg, global lead of Accenture LearnVantage, said clients are worried about how technology will disrupt their workforce and are asking: How many people will be impacted, and where should they focus their learning to stay relevant?

“They’re all very focused on certifications. They want their people to be credentialed when they’re doing something. They’re all getting very, very picky,” he said. “And our clients are expecting employees to refresh their skills every three to six months.”

Organizations’ top priorities in reskilling or upskilling involve AI, cloud data, security, and full stack engineering, according to Durg. For AI, there are multiple skill domains that include regulation, security/privacy, optimization, initialization, tuning, and loss function. Within those domains are additional subcategories, such as AI model simulation.

The point? As more AI models are brought to market and others continue to evolve, the skills needed to develop and deploy AI are continually changing.

When discovered, however, the ROI can be significant. What may have taken four people to develop a marketing campaign can now be created with two or even one person using AI, Durg said. “We are seeing 40% to 50% increase in productivity within that field through the use of AI,” he said.

And workers who get certified in needed hard skills can earn an average of $10,000 more a year, according to online learning platform JobSkills.

“I think this process is very iterative. It has to continue to happen,” Durg said. “Assessments need to happen every year, because as technologies change, you have to keep refreshing yourself. The mindset needs to be one where you’re always open to learning new things.”

OpenAI unleashes o3-mini reasoning model

January 31, 2025 /

OpenAI on Friday released the latest model in its reasoning series, o3-mini, both in ChatGPT and its application programming interface (API). It had been in preview since December 2024.

The company said in its announcement that it “advances the boundaries of what small models can achieve, delivering exceptional STEM capabilities — with particular strength in science, math, and coding — all while maintaining the low cost and reduced latency of OpenAI o1-mini.”

OpenAI said that o3-mini delivered math and factuality responses 24% faster than o1-mini, with medium reasoning effort, and testers preferred its answers to those generated by o1-mini more than half the time.

In addition, the announcement said, “while OpenAI o1 remains our broader general knowledge reasoning model, OpenAI o3-mini provides a specialized alternative for technical domains requiring precision and speed. In ChatGPT, o3-mini uses medium reasoning effort to provide a balanced trade-off between speed and accuracy. All paid users will also have the option of selecting o3-mini-high in the model picker for a higher-intelligence version that takes a little longer to generate responses. Pro users will have unlimited access to both o3-mini and o3-mini-high.”

The model is now available to users of ChatGPT Plus, Team, and Pro; Enterprise and Education users must wait another week. It will replace o1-mini in the model picker, providing higher rate limits and lower latency. OpenAI is tripling the rate limit for Team and Plus users from 50 messages per day (with o1-mini) to 150 messages per day with o3-mini. The company did not state usage limits for free plan users.

In addition, an early prototype of integration with search will find answers online, with links to their sources.

The model also offers new features for developers who incorporate OpenAI models in their software, including function calling, developer messages, and structured outputs. They can also choose one of three reasoning effort options — low, medium, and high — to adjust power and latency to suit the use case. However, unlike OpenAI o1, it does not support vision capabilities. The company said that o3-mini is available in the Chat Completions API, Assistants API, and Batch API now, to select developers in API usage tiers 3-5⁠.

In addition to its performance, OpenAI touted the model’s safety. “Similar to OpenAI o1, we find that o3-mini significantly surpasses GPT-4o on challenging safety and jailbreak evaluations. Before deployment, we carefully assessed the safety risks of o3-mini using the same approach to preparedness, external red-teaming, and safety evaluations as o1.”

GDPR authorities accused of ‘inactivity’

January 31, 2025 /

Data protection authorities in Europe imposed fines amounting to €1.2 billion last year according to the seventh edition of commercial law firm DLA Piper’s GDPR Fines and Data Breach Survey.

For the period since January 28, 2024, this represents a decrease of 33 percent compared to the fines of the previous year. This is the first year-on-year decline in fines, it said — although 2023 was unusual: Ireland fined Meta a record €1.2 billion that year, and no comparable fines were imposed in 2024.

In total, the fines imposed since GDPR came into force in May 2018 amount to €5.88 billion. Large technology companies and social media giants in particular have had to pay. Almost all of the ten highest fines imposed since 2018 relate to the tech industry, including the fines of €310 million euros imposed on LinkedIn by the Irish data protection authority in 2024 and a €251 million fine for Meta.

Ireland continues to impose the most fines by a wide margin: since May 2018, it has now imposed fines of €3.5 billion. In comparison, Germany has imposed fines totaling €89.1 million since the GDPR came into force. According to DLA Piper, the German data protection authorities are focusing on breaches of the integrity, confidentiality and security of data processing.

GDPR remains a powerful instrument

“This year’s results show that the data protection authorities in Europe continue to follow a clear line,” commented Jan Geert Meents, partner in the German Intellectual Property & Technology (IPT) practice group at DLA Piper, on the latest study results. The decline in the total volume of fines is ultimately due to extraordinary events in the previous year and does not mean a slowdown in regulatory activities. “The GDPR remains a powerful tool to ensure data protection and promote compliance. This is particularly true for Germany.”

Data protection activists, on the other hand, have a much more sober view of the current situation in terms of procedures and fines. The noyb association with its CEO Max Schrems even speaks of “inactivity of national data protection authorities“. On average, only 1.3 percent of all cases before the data protection authorities result in a fine, the activists report, citing statistics from the European Data Protection Board (EDPB).

Proceedings take too long

The idea that the GDPR has brought about a shift towards a serious approach to data protection has largely proven to be wishful thinking, according to a statement from noyb. “European data protection authorities have all the necessary means to adequately sanction GDPR violations and issue fines that would prevent similar violations in the future,” Schrems says. “Instead, they frequently drag out the negotiations for years — only to decide against the complainant’s interests all too often.”

The activists speak of a specific phenomenon in data protection. in 2022, for example, the Spanish data protection authority received 15,128 complaints. However, only 378 fines were imposed — including obvious violations such as unanswered requests for information or illegal cookie banners, which could theoretically be dealt with quickly and in a standardized manner. Those responsible at noyb cite the following as a comparison: 3.7 million speeding tickets were issued in Spain in 2022. Similar ratios would apply to practically all other EU member states.

Max Schrems Datenschutzaktivist noyb
Data protection authorities lack the motivation to enforce the law entrusted to them, complains Max Schrems, CEO of noyb.

David Bohmann PID

“Somehow it’s only data protection authorities that can’t be motivated to actually enforce the law they’re entrusted with,” criticizes Schrems. “In every other area, breaches of the law regularly result in monetary fines and sanctions.” Data protection authorities often act in the interests of companies rather than the data subjects, the activist suspects.

Fines motivate compliance

It is precisely fines that motivate companies to comply with the law, reports the association, citing its own survey. Two-thirds of respondents stated that decisions by the data protection authority that affect their own company and involve a fine lead to greater compliance. Six out of ten respondents also admitted that even fines imposed on other organizations have an impact on their own company.

In fact, the focus of the data protection authorities could shift somewhat, which could lead to more fines being imposed. DLA Piper refers to an announcement by the Dutch Data Protection Authority. It wants to investigate whether the directors of Clearview AI could be held personally liable for numerous GDPR violations after a fine of 30.5 million euros was imposed on the company. “This investigation could signal a potential shift in the focus of regulators towards personal liability and more individual accountability,” the legal experts interpret the move.

Personal liability — a new phase in GDPR enforcement

“The increasing focus on the personal liability of managers marks a new phase in GDPR enforcement,” comments Verena Grentzenberg, partner in DLA Piper’s IPT practice group in Germany with a focus on data protection. “This sends a clear signal to companies that breaches of data protection will not remain without consequences — not even at the level of the individuals involved.”

Apple Q2: Services buys time, what next?

January 31, 2025 /

Continued stress between the US and China and the slow transition to Apple Intelligence may be limiting Apple’s business growth, but there’s no legitimate way to deny the strategic success of CEO Tim Cook’s decision to build Apple’s services business (a decision he likely had in mind during the Beats purchase in 2014). The money it is making with services gives the company strength with which to weather these storms.

Think about it like this. Yes, Apple’s iPhone sales in China fell, and yes, regions in which Apple Intelligence is available saw iPhone sales outpace those in which it is not, but services increased 14% year-on-year, generating $26.3 billion in revenue — around 21% of Apple’s total revenue during the most recently revealed quarter. That’s why it means so much that Cook said, “In services, we achieved an all-time revenue record, and in the past year we’ve seen nearly $100 billion in revenue from our services business.”

That’s double Cook’s original ambition for services.

The cost of doing business

What makes those dollars even more valuable to Apple is the number of them it gets to keep: While the company generates a 39.31% margin on hardware revenues after costs, it books an astonishing 75% margin on services. In other words, for every 10 dollars of services income Apple creates, it keeps around $7.50.

Other details from Apple’s most recent financial results:

  • Revenue: $124.3 billion (+4% YoY)
  • EPS: $2.40 (+10% YoY)
  • Gross margin: 46.9% (but much higher for services)
  • Net income: $36.3 billion
  • Product revenue: $98 billion (+2% YoY)
  • Services revenue: $26.3 billion (+14% YoY)

Morgan Stanley analyst Erik Woodring today shared his estimate that the average revenue per user Apple is generating with services has now reached around $72 per user, up $5 on the last quarter. 

Apple’s management also confirmed that the iPhone 16 is outperforming the iPhone 15 range. The company said there’s been a record increase in iPhone upgrades during the quarter, presumably as its customers ensure they have the correct devices to run Apple Intelligence.

Services, services, services

Apple has managed its services pivot across the last few years. This configuration is a huge lesson to any business in that it shows the value of diversification. While Apple’s attempt to diversify its own business with services benefited hugely from the company’s incredibly positive customer satisfaction levels, any business should seek out related opportunities if it hopes to maintain growth in challenging circumstances.

“Services continues to see strong momentum, and the growth of our installed base of active devices gives us great opportunities for the future,” said Apple CFO Kevan Parekh. “We also see increased customer engagement with our services offerings. Both transacting and paid accounts reached new all-time highs, with paid accounts growing double digits year over year. Paid subscriptions also grew double digits.”

Services income also requires hardware sales, and not every Apple service will be generating anything like these numbers. The accretive nature of this part of the business is a little like the small fish that lives on a larger whale — you can’t have one without the other.

But in Apple’s ocean, Parekh’s revelation that the company has “over 1,000,000,000 paid subscriptions across services on our platforms” shows there’s plenty of fish in its ocean. Even as competition authorities force more competition into those waters, it’s a solid bet that Apple will continue to generate good business from the services segment.

Not playing games

Kicking the raw data Apple provided on its consolidated balance sheet around, you’ll see that services revenue after direct sales-related costs delivered almost half of Apple’s overall net income during the quarter. And if hardware revenue tracks overall hardware margins at 39.1%, then services at 75% is generating more actual net income than any Apple product other than the iPhone. Apple Fitness, indeed. Apple Arcade is not just playing games.

Ultimately, however, Apple’s services income is doing the job it should be doing and generating a lucrative slice of high-margin income that protects the company against product sales-driven challenges. It is also acting as a bulwark as the company engages in the transition to Apple Intelligence.

But while the company has done an excellent job crafting business resilience and bought itself time with the initial introduction of its own system-wide AI, it still needs a follow-up punch to consolidate its gains. Is Apple really going to rely on international language rollouts of Apple Intelligence, or does it plan new models for WWDC? How does it intend to augment services with additional offers its customers can’t resist? 

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