March 25, 2013:The changing face (and profits) of Apple’s iTunes Store

Screen-Shot-2013-03-22-at-3-22-2.39.55-PM-620x516Apple has long maintained that its iTunes Store is a breakeven business, with the margins made on selling music (and more recently films, TV shows, e-books and apps) cancelled out by the costs of running the store.

If you’ve got an interest in the evolving economics of Apple’s store, though, a new blog post by Asymco is a must-read, noting that “the business has grown so rapidly… that its profit-free nature has come under severe pressure”.

Analyst Horace Dediu elaborates: “What is known as 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.”

He goes on to break down Apple’s data, estimating that the company currently generates 15% operating margin on the iTunes Store, making it more than $2bn of profit a year.

What’s interesting about Dediu’s calculations is that they clearly show music as still being the biggest source of iTunes revenues, ahead of apps and Apple’s own software products. The margins are much higher on the latter category, which includes consumer suites like iLife and iWork as well as pro tools like Final Cut Pro and Logic Pro.

But it’s a reminder that music still has an important role to play within Apple’s iTunes ecosystem – which itself is a reminder that the company has to nail its future iTunes transition from music downloads to streaming/access.

Although history – iPod to iPhone and MacBook to iPad for example – tells us Apple is hardly shy about cannibalising its own products if it sees a bigger opportunity ahead.


Stuart Dredge
READ MORE: Analysis News
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