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How Profitable is iTunes?

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  • How Profitable is iTunes?

    This is a question I address in my forthcoming book. Below is the section on the subject, undergoing final changes. The question of how much PROFIT Apple makes from iTunes is complicated, as it is not readily disclosed by Apple (they lump the revenue in with other sources such as apps). I am interested in determining to what degree the sales of digital content, in this case music, generates profit.

    I thought I would "crowdsource" this issue and see what TG readers might add (or deduct) from my analysis below.

    Led by Rupert Murdoch’s News Corporation, major media corporations are watching closely as newspaper publishers experiment with pay walls and online charges. The future of such business models is highly uncertain. Whether it is news, music, movies, or television, it is quite difficult to get the online consumer to pay for content. Consider how Apple’s much-touted success in online music sales, with annual revenue in 2010 of approximately $4.1 (U.S.) billion, may be little more than a loss-leader.

    Apple earns only modest profits from iTunes and related online divisions. Peter Oppenheimer, Chief Financial Officer of iTunes and the App Store, admitted in 2010 that ‘regarding the App Store and the iTunes Store, we’re running those a bit over break-even, and that hasn’t changed.’1 Apple uses iTunes as a lure for selling its cellular phones. By 2013 Apple was estimated to bring in $12 billion in annual revenue from iTunes and related sales, yet it remained unclear how much profit comes from the sales of music.2 Some analysts estimate that 2013 profits from iTunes will reach as much as $2 billion. This is a tidy sum but iTunes success remains ‘a source of endless frustration for the music industry.’3 Apple achieved its iTunes success by ‘manhandling the major record labels during a series of now-legendary negations’ that resulted in a pricing agreement that music executives quickly came to regret.4 So while the standard line of thinking suggests that iTunes represents the potential for enormous profit from online sale of entertainment content, the actual facts of the matter are far from clear. iTunes may also represent a looming threat for the film and television industry. It has demonstrated that an industry’s content (music) can end up in the hands of another industry (Apple/iTunes) and be sold at a much lower price than it once cost consumers.

    1. Myslewski, ‘Apple: iPhone App and iTunes Store Don’t Make Money.’
    2. Dediu, Horace. ‘A More Complete Picture of the iTunes Economy.’
    3. Covert, ‘A Decade of iTunes Singles Killed the Music Industry.’
    4. Ibid.
    Last edited by E-Male; 05-16-2013, 04:20 PM.

  • #2
    Re: How Profitable is iTunes?

    I'll give my completely biased and personal opinions of the subject which are by
    no means gleamed by any in-depth research.

    Merely because Itunes earns 'less' than the other subdivisions of Apple's empire
    does not mean that it isn't profitable. In fact I'd argue that the very existence
    of Itunes is perhaps one of the sole reasons Apple's brand is so popular today
    even in regards to their Desktop Computers.

    If the function of Itunes is that it 'break even' then it is perhaps one of
    the most profitable lures in existence. Itunes solidified a market for the
    MP3 player by effectively mandating consumer loyalty to perpetuity. You
    simply can not put a value on lifetime loyalty of whole segments of the
    market who will now be forced to continue to buy items through that
    marketplace and your specific hardware to use it.

    Who cares if you are breaking even with a segment of your empire
    that only costs you 4 billion when you make a two fold profit on the
    part that costs you 40 billion.

    Slightly off topic rant bit about the Smart Phones

    Smart Phones are fast becoming the device that encapsulates the philosophy of
    instantaneous want-based force feeding consumption of entertainment (and
    ultimately the monetization of our personal free time'). So much of what a Smart
    Phone does is specifically geared to an on demand consumer model of short lived
    'digital luxuries' that are as quickly consumed as they are cheap.

    The point, however, for all of the recent advancements and 3gs and 4gs and beyond
    is not to sell these cheap shovel wares (e.g. Itunes and Angry Birds), rather it is to
    secure what we decided a few years back was unacceptable, the elimination of net
    neutrality and the monetization of the mere 'consumption' of the internet (data plans).

    It is absolutely ridiculous that so many millions of people, soon to be over a billion, are
    so inclined to be ever connected to the shopping mall and the Entertainment Complex
    that they would pay incredibly high monthly fees for incredibly limited services simultaneously
    with incredibly restrictive contracts that subsidize incredibly expensive devices that
    ultimately serve to create this 'never off' culture.


    • #3
      Re: How Profitable is iTunes?

      Thanks Ytman.

      What I really need is an analysis based on concrete financial data.

      Smart phones are very smart. It is the consumer who lacks intelligence when giving away so much personal data for free and with so little disclosure.




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