Wednesday, 27 March 2013 06:06

Apple now making billions from iTunes Featured

iTune Revenues. (Source: Asymco) iTune Revenues. (Source: Asymco)

ITunes is ten years old next month. Apple initially said that it hoped iTunes would break even. Now it’s an app store and it’s making $2 billion a year.

Apple watcher Horace Dediu’s Asymco newsletter has published an analysis of revenues from Apple’s iTunes store since its inception in 2003, when the iPod was released.

“iTunes today has quintupled in seven years. Although cost of content sales are likely to have been preserved as a ratio (about 30%) the vastness of transaction volume (estimated at 23 billion item transactions in 2012 alone) implies that there are some significant economies of scale,” says Dediu, who was keynote speaker at the swipe conference in Sydney last September.

“As more media types have been added costs have increased but revenues have increased even faster. Operating costs are spread more evenly. At break-even the cost of operating iTunes stores would be about $3.75 billion. It’s hard to imagine this level of operational expense for digital content.

“For this reason, Apple management has begun since 2010 to suggest that at least the App Store is run ‘a little over break-even’. How little is a good question. A 1% operating margin would imply as much as $45 million profit. I estimate 2% is possible on apps and 1% on music. But since folding its Software group into iTunes (the blue area in the graph) the picture changes dramatically.”

Dediu says the software group is one of the forgotten heroes of Apple. It is responsible for the iOS and OS-X operating systems, which are free but which make money on upgrades, and the iWork and iLife products sets. There are also some quite expensive products like Final Cut Pro (a video editor), Logic Pro (a music editor), Aperture (photo workflow) and Xcode (a development tool).

“All these products are now sold through either iTunes App Store or Mac App Store,” says Dediu. “They used to be sold as traditional boxed software for many years but Apple has transitioned them all to be download-only and folded them into the catalogue of third party apps while lowering prices.”

Dediu estimates that Apple’s own software generated US$3.6 billion in revenues in 2012. “This is a high margin business which grows at nearly 20% a year. This means that iTunes inclusive of Apple’s own software generates as much as 15% operating margin on gross revenues. That’s over US$2 billion a year.”

So much for breaking even.

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Graeme Philipson

Graeme Philipson is senior associate editor at iTWire. He is one of Australia’s longest serving and most experienced IT journalists. He is author of the only definitive history of the Australian IT industry, ‘A Vision Splendid: The History of Australian Computing.’

He has been in the high tech industry for more than 30 years, most of that time as a market researcher, analyst and journalist. He was founding editor of MIS magazine, and is a former editor of Computerworld Australia. He was a research director for Gartner Asia Pacific and research manager for the Yankee Group Australia. He was a long time weekly IT columnist in The Age and The Sydney Morning Herald, and is a recipient of the Kester Award for lifetime achievement in IT journalism.

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