updated 01:20 pm EDT, Wed May 28, 2014
Users spending less money on music
Apple's revenues from iTunes music sales are continuing to shrink, but these will soon be fully compensated for by sales at the App Store, says Morgan Stanley analyst Katy Huberty. In the last quarter, people with iTunes accounts spent an average of just $3.29 on music, a drop of 24 percent year-over-year. Based on estimates though, it's predicted that by the end of 2014 App Store sales should not only replace lost revenue but surpass it.
Huberty suggests that there are three ways Apple can now exploit the 800 million-plus iTunes accounts people have registered. The first is by launching a full-scale subscription music service, as opposed to the current state of iTunes Radio, which is similar to Pandora but for the which the only paid upgrade is the option to remove ads as an iTunes Match subscriber. A buyout of Beats Electronics may help.
Another proposed option is Apple's rumored mobile payment system. Huberty argues that this could keep customers loyal and sell more devices, but that the real profits would stem from ads, subscription fees, and/or transaction charges.
Lastly she suggests that the iWatch could generate more app sales. In 2013 annual App Store spending averaged $18 per customer, but it's forecast that the iWatch could add another $9. Assuming iWatch shipments reach 32 to 58 million in their first 12 months, this could push net revenue from app sales up by $43-80 million. In the year following, it's estimated that net revenue could rise by $188-261 million.