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Who thought Apple's cash mountain that is the iTunes and App Store would be a break even business? Honestly I never really took Apple's claims that the iTunes and App...
06-13-2011, 10:06 PM #1
iTunes Store and App Store Cost Estimated $1.3 Billion To Run
Who thought Apple's cash mountain that is the iTunes and App Store would be a break even business?
Honestly I never really took Apple's claims that the iTunes and App Store didn't generate much profit, but Asymco blogger Horace Dediu crunched some very convincing numbers using data published by Apple during last weeks WWDC.
Apple has estimated their digital store downloads have reached 15 billion songs, 130 million books, and 14 billion apps. Dediu combined these numbers with average price of songs, books and apps purchased to come up a monthly total income of $313 million versus $113 million in operating costs. That $113 million a month equates to nearly $1.3 billion a year to run the iTunes and App Stores.
Still with these numbers that leaves about $200 million in profits after expenses. However, the comments by Apple CFO Peter Oppenheimer that iTunes is running just over break even does make sense after analyzing just where that excess money is going. The exponential growth and traffic the App Store has seen since its inception and the growth of the iTunes store as well means more and more money must be sunk into expansion and upkeep. Still $200 million in expansion and investment would be quite ludicrous. But, those who understand capital investment vs an Income Statement know that times of heavy investment, like say sinking $1 billion into a data facility would show iTunes and the App Store as breaking even, or taking a loss for the year.
Dediu suspects that is exactly where much of the excess capital generated by the iTunes operating margin went, to help build Apple's iCloud hungry data centers.
Without an open look at Apple's accounting techniques and internal financial statements all this is still educated guessing. However, at $1.3 billion in operating costs, the App Store and iTunes store generate enough income to Whether that business is as break even as Apple's top brass would like us to believe is another story.
Last edited by Phillip Swanson; 06-13-2011 at 10:46 PM.
06-13-2011, 10:57 PM #2
I did. Apple has made it very clear they are hardware company and they are content to make little profit on songs and apps and shloads of cash on hardware.
06-13-2011, 11:30 PM #3
Weird, I was just thinking about this today. I was looking at a list of my downloaded apps today in my iTunes account management screen, and I downloaded 20x times as much free apps and updates than I've paid for. It's kind of ridiculous. I mean, when I upgrade Infinity Blade, that's nearly .6 gigabytes. For free. Their servers must suck down enough electricity to power New Jersey.
Which makes me wonder, if they make most of their money on hardware, why on Earth hasn't the iPhone 5 come out yet? What are they waiting for? Is it because they want to perfect iCloud and iOS 5, and it was running behind in development? Did they trip over their own feet? Or, are they still selling millions of iPhone 4's so they're cashing in like crazy on this generation first? The truth is probably somewhere in between...
06-14-2011, 12:45 AM #4
It isn't necessarily that they don't make much profit on the content it's that they take a big enough piece of the pie despite their breaking even that ensures the competition doesn't create a stranglehold on the content and force Apple to have to buy their way into their competition's vast plethora of content.
06-14-2011, 12:54 AM #5
without the software the hardware would not have been so successful.
06-14-2011, 07:18 AM #6
i understand the low profit margin on the app store. however the music store has high prices and the database is awful : where is the info commonly found on physical CDs. song authors, musicians, info on studio where tracks were recorded and all of that? it's almost 10 years now and the quality of the database is really bad. It's getting annoying. It's ruining my taste for paid music. And, because apple sets the standards , all other digital stores have the same identical faults. what are they spending money on? The only significant costs should be royalties and keeping the database, and the latter is done in the cheapest possible way.
06-14-2011, 08:15 AM #7
I don't doubt they make little to no profit on their music business and am fairly certain that is the section that was being referred to as a break even system. However, I'm pretty sure the app system has helped bring their digital distribution group farther into the green over the last couple of years. There is a reason that places like Amazon and Google can afford to offer that same app service for a fraction of the cut.
06-14-2011, 08:51 AM #8
'For now they may not be making any money, but that is just like sirius satellite radio. They took loses because of all of the initial invistment just like apple with all their servers. But after a couple of more years all they will pay for is maintenance and developers/artists so they will generate more money than they do now.
06-14-2011, 09:14 AM #9
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If they keep pumping out new models every 10-12 months then they're going to start to piss off a lot of customers who can't keep up with the current spec.
The iPad 2 should have never been released as early as it was, places like Australia got it end of may only for it to be superseded less than a year later.
As an Apple customer I get nervous about making any purchase from them...how long will it be exactly until it's grossly outdated? A week? A month? A year? We're familiar with this process in the PC market but upgrades don't cost much in comparison to a whole new Mac or iDevice...Apple have to be really careful of this, IMO they're powering forward far to quickly and if they're not careful I think they'll trip up.
The iPhone 4 is an incredible piece of kit, why is everyone in such a hurry to replace it already?
If they released the iPhone 5 tomorrow I doubt sales would be anywhere near as the iPhone 4, too many people are locked into contracts they can't get out of without paying huge fees and to be honest they're probably happy with what they've got. The faster processor and a slightly better camera and a different screen size is probably not enough to make people take the leap to a new device. The differences between the 3 and the 4 were significant, I doubt the 4 and 5 will be too far apart.
Last edited by Twimfy; 06-14-2011 at 09:17 AM.
06-14-2011, 10:24 AM #10
Ya infrastructure is tough and with the constant data that apple warehouses, its pretty nuts the amount of money they need to run it all.
Apple is a hardware company as stated. Its cash comes from sales of iDevices and computers, not music. They are just a value add to the hardware they sell.
06-14-2011, 10:57 AM #11
definatly didn't see that coming
06-14-2011, 03:28 PM #12
If I am reading this correctly, they are making a ton of money. From the math, they are taking in 3.756 Billion yearly, spending about 1.3 Billion in operating costs. That leaves 2.456 Billion in profit. If you put any of that into building a facility, you gain the amount spent in equity. At the end of the day, if Apple sinks another billion into a building, they still have 1.456 Billion in annual profit. I do not consider that break even.