Jason Snell, writing at Six Colors:

Even if a quarter of the Services revenue is just payments from Google, and a further portion is Apple taking its cut from App Store transactions there’s still a lot more going on here. Apple is building an enormous business that’s based on Apple customers giving the company their credit cards and charging them regularly. And that business is incredibly profitable and is expected to continue growing at double-digit percentages.

Most people still consider Apple a products company. The intersection of hardware and software has been Apple’s home address since the 1970s. And yet, a few years ago, Apple updated its marketing language and began to refer to Apple’s secret sauce as the combination of “hardware, software, and services.”

Snell’s article is beyond excellent, and I highly recommend everyone read it, even as someone who expresses zero interest in earnings reports or Apple’s financials at all. But this article sparked a new spin on the age-old question: Is Apple a hardware or software company? For years, my answer has always been “hardware,” despite the Alan Kay adage “Everyone who is serious about software should make their own hardware,” but the calculus behind that differentiation has always changed over the years.

When the first Macintosh was introduced in 1984, it could be argued that Apple was a software company, not a hardware one, since the Macintosh’s main invention was the popularization of the graphical user interface and the mouse, which gave way to the web. But would the same be true for the iPod, where the software just complements the hardware — a great MP3 music player — or, more notably, the iPhone, a product more known for its expansive edge-to-edge touchscreen than the version of OS X it ran? The lines between software and hardware in Apple’s parlance have blurred over the years, and now it’s impossible to imagine Apple being strictly a hardware or software company. It’s both.

But now, as John Gruber notes at Daring Fireball, there’s now a third dimension added to the picture: services. Services, unlike hardware, make money regularly and thus are a much more financially attractive means of running a technology business. Amazon makes its money by selling products constantly; Google sells advertisements; Microsoft sells subscriptions to Microsoft 365 and Azure cloud computing; and Apple sells services, like Apple Music and Apple TV+. It adds up — this is how these companies make their money. Services are no small part of Apple’s yearly revenue anymore; Apple would suffer financially if it weren’t for the steady revenue services provide. And, as Snell notes, Apple’s gross profit on services is much higher than the iPhone’s.

Apple, on the outside, is the iPhone company. Ask anyone on the street: Apple makes smartphones, and maybe AirPods or smartwatches. Yet services make more money than AirPods and the Apple Watch combined, and clearly are much more profitable than both products. This is an existential question: If a company makes its money via some product predominantly, does that mean it should be known as the maker of those products? Usually, I’d say yes. As much as the Mac is critical to everything Apple does, it is not the Mac company. Apple wouldn’t exist without the Mac because the iMac propelled the company to success. If it weren’t for the Mac, the iPod wouldn’t exist, and without the iPod, Apple wouldn’t have the money to make the iPhone. The Mac is the platform on which every one of Apple’s products relies, but Apple is not and will never be known as the Mac maker.

Someday, services revenue may eclipse the iPhone. If and when that comes true, does Apple become the Apple One company or does it remain the iPhone company? Most people would say no to that because without the iPhone, what is the conduit for services revenue? But without the Mac, the iPhone doesn’t exist. Apple is indisputably the iPhone company, but without the Mac, there is no iPhone. Apple may indisputably become a services company, but without the iPhone, there are no services. As the world continues to evolve and as people upgrade their iPhones less frequently, iPhone revenue will inevitably decrease, and Apple will slowly but surely diversify its revenue to prioritize services more. (It’s already doing that.)

Yet this inevitable truth doesn’t sit right, unlike how I felt about Apple becoming the iPhone company in the early 2010s or the iPod company in the early 2000s. And that’s because of what I said at the very beginning: Most think of Apple as a hardware company that happens to make great software, not a software company that sells its software via mediocre hardware (like Microsoft). Services inevitably are built into iOS and macOS, and thus are software, so if Apple becomes a services company, it also becomes a software company. This inevitability is difficult to grasp, and I’m not even sure if it’ll ever come true; this is not a prediction. Rather, I’m just laying out a possibility: What if Apple becomes a software company in the future? How does its financials affect the public’s perception of it? McDonald’s is fundamentally a real estate company on paper, yet people only know it as a fast food giant. If Apple eventually makes more money from services, will it still be known as a hardware company? Only time will tell.