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Asymco: Apple apps turns iTunes Store into profit powerhouse

updated 07:59 pm EDT, Fri March 22, 2013

Music, video still low-margin; growth and software add billions

A further analysis of the iTunes Store by noted analyst Horace Dediu of Asymco estimates that sales of Mac and iOS software from Apple (such as OS X upgrades and the iLife and iWork programs) have turned the store from a low-margin "break even" operation into a significant profit center, clearing an estimated $2 billion in annual revenue. In part, the profit comes from economies of scale as the various iTunes stores have seen massive growth in the past few years, but Apple's own software sales are the most profitable portion of that.

Though Apple takes some flack from critics and content providers over its general 30 percent "distributor" fee that it charges for music, video, publication and third-party app sales, the cut is largely representative of the cost of running the now-massive iTunes Store empire, Dediu finds. He believes that after expenses, the music portion of the store continues to operate at about a one percent profit margin, while sales of third-party apps generate about a two percent profit (as with videos, most of the price of music or third-party apps goes directly to the content owner or developer).

Apple's own software, however, is presumed to have a 50 percent profit margin (in line with industry standards), and isn't subject to the distribution cut -- meaning that sales of items like Mountain Lion upgrades and pro-level apps like Aperture and Final Cut provid significant profits that have now allowed the overall storefront to operate at a noticeable profit. This in spite of the fact that most Apple-made software saw huge price cuts in the transition to download-only -- OS X updates went from a routine $129 to today's $20; the iWork suite of programs went from $99 for three apps to $20 each (and iOS versions at $10 each); Aperture debuted at $500 and is now available for $80, Logic Pro went from $500 to $200, and Final Cut Pro once sold for $999 and is now available for $300.

Dediu estimates that Apple-made software sales last year topped $3.6 billion, or nearly the estimated cost of running the entire iTunes Store (which he believes is currently at $3.75 billion per year). Those sales, on top of the break-even-ish nature of most of the rest of the iTunes empire and $13.5 billion in revenue last year, provide an estimated $2 billion annual profit to Apple -- and while the sum is not particularly large in the overall scheme of Apple's routine $40-$50 billion-plus average quarterly revenues, it provides a foundation for further expansion into new markets and increased digital goods and services. Most US companies would be thrilled with a profit on that scale.

Apple's iTunes Store has seen remarkable growth in double-digit figures over recent years as the iPhone and iPad have driven mobile devices, cloud storage and digital downloading into the mainstream. In 2012, the store saw an increase in sales of 25 percent over the year before. The store generated $1.8 billion in sales during the holiday quarter alone, and added 56 countries to its list of outlets, opening the door for continued growth. In addition, in many of the newer markets (such as Brazil and Russia) there is enormous potential for increased iOS and Mac device sales, which in turn will drive iOS and Mac app sales.

Recent initiatives such as the iTunes Match premium service -- which allows users to store huge quantities of music in the cloud and stream it on-demand to their mobile devices -- and possible new features such as a rumored premium radio or curated streaming music service -- have also proven to have strong public interest. Apple may also see boosts to its self-made software sales if it releases significant updates to its pro line of software, perhaps in concert with the long-awaited overhaul of the Mac Pro, which was promised by CEO Tim Cook to debut sometime this year.

by MacNN Staff



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