Music is hot, iPad not as Apple hosts developers

SAN FRANCISCO — As Apple hosts its annual gathering of software developers in San Francisco on Monday, music has become a bigger part of the company's growth story this year than iPads and Macs.

And Apple's hottest-selling product right now – doing better even than the iPhone – is the hardware maker's own stock.

The company's move in April to boost dividend payouts and stock buybacks by tens of billions of dollars and split Apple shares 7-for-1 showed that CEO Tim Cook has a good grasp on marketing to Wall Street.

Apple shares are up 15% this year, more than tripling the return of the Nasdaq Composite Index, and have surged 40% in the last 12 months.

Yet marketing to Main Street has been more of a challenge, as smartphone growth has slowed and tablet sales are going in reverse.

While iPhone revenue rose 14 percent for the quarter ended in March, that's well below the overall market growth rate of 23 percent expected for all of this year by market researcher IDC.

The numbers show how much Apple has already missed of the market for smartphones with extra-large screens, which Samsung and other Asian rivals have used to take share.

Meanwhile, iPad revenue fell 13% in the latest period, dragging down the company's top-line growth rate to just under 5%, year-over-year.

Unless Cook can re-ignite iPad sales – where revenue fell 2% (year-over-year) for the six months ended in March – Apple's $3 billion acquisition of Beats Audio (and Beats Music) will be important to the company's growth prospects.

Make no mistake, Apple's revenue growth this year will depend mostly on how good a new smartphone it puts on the market for the crucial back-to-school and holiday shopping seasons.

With iPhone sales at $26 billion for the March quarter, smartphones contributed 57% of Apple's total sales.

Yet Cook will need to squeeze more out of some other product area to keep growth investors happy.

Given the company's recent sales figures – and the pending Beats deal – music hardware, songs and related apps could be the best candidates.

Including music and apps revenue, iTunes sales rose 11% during the most recent period to $4.6 billion, and now make up 10% of Apple's total sales.

That's almost as much as sales of Macs, which contributed 12% of revenue at $5.5 billion, and where growth is in the single digits.

Software sales are also gaining in size relative to tablet sales, which (as noted above) dropped big-time last quarter and now represent just 17% of Apple's top line, at $7.6 billion.

Reviving iPad growth ultimately will depend on creating an ecosystem of apps that is deep and wide enough to keep attracting mobile consumers to the Apple platform.

To do that, Cook needs to inspire software developers inside and outside the company to come up with some hits.

If they want to attach themselves to Apple's most promising growth story right now, following Cook's lead into music might be one way to do it.

John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.