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The one bright spot in Apple’s dramatic letter to investors

Daniel Howley
Technology Editor
Apple CEO Tim Cook speaks during an event to announce new products Tuesday Oct. 30, 2018, in the Brooklyn borough of New York. (AP Photo/Bebeto Matthews)

On Wednesday, Apple (AAPL) CEO Tim Cook dropped a bombshell when he published a letter to shareholders announcing that the company was revising its Q1 2019 revenue projections from between $89 billion to $93 billion down to $84 billion.

The news sent shockwaves across Wall Street, with Apple’s stock falling as much as 9.5% Thursday afternoon. The problem, Apple said, was that iPhone sales in the Greater China market were well off expectations, which put serious pressure on the company’s projected earnings.

But things aren’t all doom and gloom for Silicon Valley’s biggest company. In his letter, Cook also pointed out a bright spot for Apple. Its services division, which includes the App Store, iCloud and Apple Music, continues to grow.

And with a video streaming service rumored to debut some time this year, Apple is quickly laying the groundwork to reinvent itself as a services company rather than an iPhone factory.

Services are poised for continued growth

While Apple’s projected revenue missed the mark due to iPhone sales, its services business pulled in $10.8 billion, a 28% year-over-year increase. That’s a big win for the company, which has its sights set on doubling the business segment’s 2017 revenue by 2020. That would equate to roughly $14 billion per quarter.

Apple’s services business is made up of a number of offerings including Apple Care, Apple Pay, iTunes, the App Store, Apple Music, and iCloud. And with 1.3 billion active devices in consumers’ hands, including iPhones, iPads, MacBooks and more, Apple has a built-in captive audience. When Apple debuts a new service, as it did with Apple Music, the company more or less flips a switch and pushes the new app to those 1.3 billion devices.

If the business segment’s continued growth wasn’t already a good sign for the company, rumors that Apple could launch its own streaming video service in 2019 could provide an even greater boost to the tech giant’s bottom line.

There’s no doubt Apple will face stiff competition from the likes of Netflix (NFLX) and Hulu, which is why the company is already reportedly working with Hollywood heavyweights like Steven Spielberg. And with that huge built-in audience of 1.3 billion devices, Apple has the potential to instantly become a big player in the streaming space as it did with Apple Music, which has more than 56 million paid and free-trial users. Spotify, the segment leader, has 87 million paid subscribers.

There are potential roadblocks

The future of Apple’s services business, however, isn’t a lock — two potential hurdles could throw cold water Apple’s services segment. The most pressing issue is a Supreme Court case that could determine whether Apple will have to battle a consumer lawsuit claiming Apple has an illegal monopoly because of the App Store.

The suit, if allowed to proceed, would determine if Apple can continue to take a 30% cut of App Store app sales, which the consumers say inflates app prices.

Then there are the subscription service providers that are fed up with having to pay App Store fees. Netflix and Spotify recently stopped allowing new subscribers to pay their monthly bills through Apple’s App Store, effectively cutting Apple out of the transaction and allowing them to keep all of the revenue from their services. Users can still download the apps from the App Store, but are then redirected to Netflix’s and Spotify’s websites where they can sign up for subscriptions.

It’s unlikely that this will result in an overwhelming impact on Apple’s bottom line, but it’s yet another potential problem that the company has to deal with at a time when its business is seemingly facing threats from all sides.

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Email Daniel Howley at dhowley@oath.com; follow him on Twitter at @DanielHowley . Follow Yahoo Finance on Facebook , Twitter , Instagram , and LinkedIn.finance.yahoo.com/