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TheStreet Open House

Apple Touts Ecosystem in New FaceTime Ad

NEW YORK ( TheStreet) -- Apple's (AAPL) new ad for FaceTime not only shows off the many different ways people use FaceTime, it continues the trend of Apple focusing on the software and services it provides along with the hardware to keep people in the iOS ecosystem. That's something that's poised to grow, as Apple continues to focus on software and services in the coming months and years.

As with the "Photos Every Day" and "Music Every Day" ads, Apple is demonstrating that its ecosystem is much different than those of other companies, including Google's (GOOG) Android operating system and Microsoft's (MSFT) Windows Phone operating system. Sure, both of those ecosystems have photo storage, music services and video calling, but Apple has been able to seamlessly put all of these services under one roof and demonstrate the value these additives provide to its hardware.

Google and Microsoft haven't been able to effectively showcase the added benefits of their services in consumer advertising, especially in light of the fact that Microsoft spent $8.5 billion on Skype several years ago.

CEO Tim Cook has emphasized over the past several months that Apple is much more than a hardware company, and has even mentioned that Apple will be focusing on software and services on earnings calls.

"Our teams are hard at work on some amazing new hardware, software, and services that we can't wait to introduce this fall and throughout 2014," Cook said on Apple's fiscal second-quarter earnings call.

By highlighting these products in commercial advertising, Apple not only demonstrates the power of its ecosystem, it continues to show just how valuable Apple's software is from a revenue standpoint. Apple generated $3.99 billion in software revenue last quarter, up 25% year over year. Much of that is from iTunes, but other services and software like iCloud storage are helping Apple demonstrate to investors that perhaps margin concerns are a bit overblown.

AAPL Chart AAPL data by YCharts

Last quarter, Apple generated gross margins of 36.9%, compared to 42.8% in the year-ago quarter. Much of the company's revenue comes from hardware sales such as the iPhone and iPad, which have caused the gross margin concerns. However, as software and services continue to become a bigger focus at Apple, the margin pressures may subside as software tends to have higher margins than hardware.

Apple had been in a lull with its advertising, and has only recently started to appeal again to the consumer with its advertising campaign. The new FaceTime "Every Day" ad is a continuation of that trend. That's something that shareholders will be keen to see more of in the coming months, as Apple and Cook continue to focus on not just the latest iDevice but the latest software and service features as well.


-- Written by Chris Ciaccia in New York

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