Spare a thought for Apple and its raging New Year's hangover.
The company's stock price plummeted in after-hours and pre-market trading on Wednesday, as the company revised its revenue estimate for its first fiscal quarter down to $ 84 billion. Apple had previously invested in expecting revenue between $ 89 billion and $ 93 billion.
Chief Executive Tim Cook pinned the blame on lower iPhone demand and the slowing Chinese economy, compounded by President Donald Trump's trade war.
As Wall Street to the New Reality of Peak iPhone, Cook Was Conquering: Look at our burgeoning services business! Lots of revenue!
Services, Cook wrote on Wednesday, "generated $ 1
This is an important narrative for Apple, which has been trying to distract Wall Street from peak iPhone since about 2016, when it started talking up its "non-iPhone revenue." The idea is that Apple won't earn money forever from high-margin hardware like the iPhone, and instead can earn sustainable revenue by getting existing users to pay for services like the App Store, Apple Music, iCloud storage, and AppleCare.
This would be more convincing if it wasn't for Netflix
This isn't reassuring Wall Street just yet, and here's why.
Apple does break down its revenue revenue, instead dumping various software revenue streams under the one umbrella. We don't know, for example, how much revenue iCloud subscriptions brings in versus Apple Music subscriptions.
Read more: Netflix is a $ 256 million revenue stream for Apple by circumventing iTunes billing
We can calculate, though, that a decent chunk of the money comes from the App Store.
Apple splits app revenue with developers, skimming up to 30% off app subscriptions, purchases, and one-off payments.
The company said developers earned $ 26.5 billion from apps in 2017. This is after Apple slipped off its 30%, this suggests the company earned around $ 11.35 billion from the App Store for the full year 2017. Apple said it earned $ 29.9 billion from services in 2017, so that suggests App Store accounted for nearly 38% of services revenue that year.
This is a nice earner for Apple as long as developers keep playing ball. This isn't just about skimming 30% off flash-in-the-pan mobile games, but earning continuous revenue from subscriptions to online services like Netflix and Spotify, which cost up to $ 170 a year.
Except developers are not playing ball.
Netflix has just altered its signup process so that iOS users won't be billed for their subscriptions through iTunes. That lets the streaming service dodge the 30% fee (or 15% after a year) that Apple charges and keeps the subscription money for itself. Netflix happens to be the app that currently has the most money for Apple in the US.
Spotify has been fighting iTunes billing for years, asking lapsed subscribers to update their subscription directly through its website. In 2016, the company said Apple's fee was actively harming its business.
Amazon similarly dodges iTunes billing on Kindle ebook purchases, by forcing people to buy ebooks through its website rather than through the Kindle iOS app.
It's a case of bad timing for Cook that Netflix decided to pull its iTunes billing stunt just days before Apple announced lowered revenue and tried to point to services as the new growth business.
It is not clear how Apple will respond to Netflix, or prevent other developers from taking the same route. The company may make an aggressive move and block the Netflix app, although it is difficult to see how it raises competition questions given Apple is currently building its own Netflix competitor.
Alternative, Apple may cave and drop its fees further. But that would help the services growth narrative at further risk – and no amount of handwaving.