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Analyst: Apple's iTunes now costs $1.3 billion per year

updated 10:05 pm EDT, Mon June 13, 2011

Apple says store runs "slightly above" break even

Asymco's Horace Dediu has looked into the latest statistics on the iTunes Store gleaned from stats revealed during the WWDC keynote -- as well as recent statements from Apple's quarterly phone conference with analysts -- and concluded that if the store is being run at break-even levels, the costs associated with it may be as high as $1.3 billion annually.

Some have taken Dediu's assumption that the store is run at break-even levels as being flawed: Apple officials including CFO Peter Oppenheimer and COO Tim Cook have always characterized the store as running "slightly above" break-even levels over recent years, implying that the store does make a modest profit -- though what constitutes a "modest" profit on an operation that posts revenue of $313 million per month (and growing) hasn't been clearly defined by the company.

Dediu looked at the average price of songs and apps, the known 70/30 split between developers or music labels and Apple and other "known constants" of Apple iTunes business, along with impressive statistics from the keynote (such as 15 billion iTunes song downloads, 14 billion app downloads and so on) and produced a chart showing his estimate of iTunes' margins. Using his assumption that the store runs at roughly break even, the date implies that the iTunes empire costs the company over $1.3 billion per year, but makes some $3.76 billion in revenue. Most of the difference between the two figures, Deidu says, is the royalties Apple pays to app developers or music labels, movie and TV content producers, artists and other rights holders.

Dediu's estimate presumes that most of the $1.3 billion in costs comes from hosting and serving the content, along with payment processing. Another undetermined portion goes into support and "curation" of the offerings, and assumes a portion is amortized costs relating to capacity increases. He speculates that a significant portion of the investments that went into the recent data centers in California and North Carolina came from iTunes operating margins. [via Asymco]









by MacNN Staff

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Comments

  1. ASathin8R

    Joined: Dec 1969

    +8

    So much for all the rubbish

    ...that they naysayers carry on about when complaining about Apple's 30% iTunes store cut. The service is there to support users who want to get content on their Apple devices, legitimately. They have paid out over $2.5 billion to app developers and who knows how much to the record companies and movie studios.

    And let's not forget the thousands of free apps Apple makes available to users, and all the free podcasts and iTunes U. There is an abundance of content that Apple has to host and serve to users for which it gets absolutely nothing in return.

    Comment buried. Show
  1. facebook_Clarence

    Via Facebook

    Joined: Jun 2011

    -15

    Expensive

    1.3 billion is nothing compared to the amount of money iTunes ends up costing end users. Such a slow, bloated software that does many things, but none of them are done well.

    Apple should be paying us to use iTunes.

  1. testudo

    Joined: Dec 1969

    -1

    Re: so much for

    You missed the key point. The guy is guessing completely. He's looking at various numbers, makes a huge assumption that the store is 'breaking even' and then says "Look at how much it costs!".

    This implies that the iTMS has no economies of scale, and that, in itself, is a load of rubbish. The point here is that no one outside apple knows how much it costs to keep it running, since Apple doesn't release such info.

    ...that they naysayers carry on about when complaining about Apple's 30% iTunes store cut. The service is there to support users who want to get content on their Apple devices, legitimately.

    This does nothing to the naysayers. There are many ways for one to get music on their apple devices legitimately. The iTMS is just one of them (or do you consider buying it anywhere else to be illegal)? And Apple allows those, so you don't have to pay apple that money, or ask them to serve your content.

    But the App store REQUIRES developers to sell on Apple's site, and to do that, they need to pay apple for the 'privilege'. There's no choice involved there. And you have to believe Apple is making money on the enterprise. They're a company, after all, not a charity.

    And let's not forget the thousands of free apps Apple makes available to users, and all the free podcasts and iTunes U. There is an abundance of content that Apple has to host and serve to users for which it gets absolutely nothing in return.

    Apple does NOT provide users with free apps. They are provided by the developers and served by Apple, at Apple's demand.

    As for podcasts, apple doesn't provide them at all. They have a place where you can search through listed podcasts, but they don't serve them up or prevent you from adding any podcast stream you can find. iTunes U works much the same way. Apple provides a little bit of up-front, but they aren't doing the brunt of the work by any means.

  1. adomzz

    Joined: Dec 1969

    0

    Impossible

    Theres no way iTunes is a break even entity for Apple. Having sold how many billion songs alone at a dollar+ each just doesn't add up. I know there are fees and royalties involved and also high costs to sustain such an intense database of media, but its all digital content and is delivered electronically. If credit card processing is such a setback, then why not set up a monthly billing option for users rather than individual transactions for each purchase? It just seems unlikely that with all the music with the addition of the entire app store and iBooks across all of their iOS devices that any types of charges or fees owed could possibly outweigh the revenue generated by Apple's extraordinary database of just about all things media. And if they were actually operating at break-even levels, I don't think Apple would continue to develop and improve the iTunes marketplace with the zeal that they do.

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