Apple may have a secret weapon with its Arcade gaming service

Jun. 20, 2022 1:00 PM ETApple Inc. (AAPL)By: Rex Crum, SA News Editor33 Comments

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It's no secret that Apple (NASDAQ:AAPL) has made its services business its next big area of growth.

With almost $20B in revenue in Apple's (AAPL) fiscal second quarter, services trailed only the iPhone, and its $50.6B in sales during the period. In fact, services now mean more to Apple's (AAPL) sales than the $18B that came from the Mac and the iPad combined during Apple's (AAPL) second quarter.

And when it comes to Apple's (AAPL) services business, the majority of attention is given to subscription options such as Apple TV+, iCloud, Apple Music and the company's Fitness offerings. What sometimes get lost in the discussion in Apple Arcade, which gives subscribers access to play more than 200 games for a fee $4.99 a month. But, ignoring Apple Arcade and its potential to add to Apple's (AAPL) services business, would be a mistake, according to J.P. Morgan analyst Samik Chatterjee.

"Apple Arcade is an economical and competitive offering and is well-positioned to take advantage of the strong growth in the mobile gaming market," said Chatterjee, who estimated that the global gaming market will reach $360B by 2028.

By Chatterjee's assessment, Apple Arcade was "one of the later entrants into the gaming market," and got off to a slow start when it was launched in 2019. But, Apple (AAPL) has been able to grow Arcade through a series of steps that the company has employed with other services such as Apple TV+, and which differentiates Apple (AAPL) from its rivals.

Chatterjee said Apple (AAPL) has stuck with "a subscription approach that provides stickiness to the [Apple] ecosystem beyond that brought about through a simple download," as well as a "collection of exclusive gaming content for the service rather than an aggregation of already published and more readily available titles." Chatterjee said that by focusing on what he called "simple games," Apple (AAPL) has been able to appeal to the broad range of Apple (AAPL) device owners and not just hardcore gamers.

"The service [has] provided Apple (AAPL) a foothold into leveraging the rapid growth in the market for mobile gaming," Chatterjee said. "As well potentially expand into adjacencies of growth through leverage of the service on devices beyond the smartphone."

For its part, Apple (AAPL) doesn't disclose the number of subscribers to Arcade, or any of its subscription services. However, thanks to a ramp up in popular titles, Chatterjee estimated that the number of Arcade subscribers worldwide should "expand rapidly" and reach 70 million by 2025, and that such a number of subscribers should contribute $1.2B in revenue to Apple's (AAPL) annual sales.

Chatterjee said there are certain factors in Apple's (AAPL) favor, including the fact that Arcade games can be accessed through multiple platforms such as the iPhone, iPad, Apple TV and the Mac itself. The service is also viewed as being economical, with its standalone $4.99 a month fee, or as part of Apple One bundles that cost $14.95, $19.95 or $29.95 a month and include access to services such as Apple Music, Apple TV+ and iCloud.

"[The] offering is a less-expensive bundled approaach for consumers who are used to buying games a la carte," Chatterjee said. "[Due to] a lower effective price when bundled as part of Apple One, we see a strong likelihood of faster-than-expected adoption [of the service]."

Last week, Apple (AAPL) took a major step in the expansion of its overall services offerings by signing a 10-year deal to be the exclusive streaming home of Major League Soccer games starting in 2023.

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