Chinese regulators are no longer playing Mr. Nice Guy with Apple (AAPL) - Get Report and while the moves won't affect the tech giant's fortunes in the near term, they aren't good news for its longer-term efforts and strategy.
Apple's iBooks Stores and iTunes Movies went dark in China last week, just six months after they were started there. Even though Apple initially received approval to introduce the services, the State Administration of Press, Publication, Radio, Film and Television has asserted its authority and demanded the closings. The crackdown was first reported by the New York Times.
"We hope to make books and movies available again to our customers in China as soon as possible," an Apple spokeswoman told the Times in a statement.
The shutdown comes as a surprise because Apple, unlike many other American tech companies, has generally been welcomed in China -- and the Cupertino, California-based company has been much better off for it.
Greater China is Apple's second-largest market by revenue, trailing only the Americas. According to its first-quarter earnings report, Apple brought in $18.4 billion in revenue through its Greater China operating segment during the period, a 14% increase from the same period a year prior.
"Clearly, China is a market that Apple has been putting greater focus on. It's about a quarter of their revenue," said Angelo Zino, analyst at S&P Global Market Intelligence.
And China is expected to be the biggest driver of growth for Apple over the next several years. CEO Tim Cook acknowledged that the company was beginning to see "some signs of economic softness" in the region in its first quarter earnings call; however, he emphasized that he is still optimistic. "We remain very confident about the long-term potential about the China market and the large opportunities ahead of us, and we are maintaining our investment plans," he said.
"China's a growth area, so obviously any time China seems to be adversarial, it is [a concern]," said Jim Cramer, TheStreet's founder and manager of the Action Alerts PLUS portfolio, which owns Apple. "I have always said we own this for Action Alerts and own it forever. Own it, don't trade it."
The current hiccup in Apple's books and movies in China may not have an enormous impact on its revenue base and overall earnings potential in the immediate future, but the showdown isn't good in terms of optics.
"From a perception basis, this could be a bit of a blow," said Zino.
The perception question goes beyond geography and also impacts its overall strategy, given Apple's recent efforts to expand its services division.
"The services business is gaining momentum and gaining more attention from investors, because it is viewed as more of an annuity-type business for the company," said Zino.
Credit Suisse analysts recently estimated Apple's services businesses could grow to more than $30 billion in annual revenue by 2020 from $14.5 billion today. Because Apple does not break out services revenue by geography, it is difficult to tell just how much of that business is being driven by China. Zino estimates it is minimal.
"Any type of issues with regards to their services business, from a perception basis, could be an issue, but overall, this isn't going to have any type of impact on the financials of the company in the immediate term," he said.
As the Times notes, what is perhaps most startling about the news is that it might indicate a change in course of China's attitude toward Apple. Apple has introduced several new products in China, including its mobile payments system Apple Pay in February, and it is reliant on the smooth operation of its software across devices to maintain its customer base.
The question now becomes whether this shutdown is a one-time deal or representative of a larger shift.
"If this is the start of a trend out in China, then it would pose a risk for Apple," said Zino.
Investors thus far appear unfazed by the news. Apple shares were down slightly in morning trading on Friday to $105.18.
Apple reports earnings after the market close on Tuesday, April 26, having delayed its report by a day so that executives can attend a memorial service for Bill Campbell, a former Apple board member and coach.