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Music Media Businesses Apple

Apple Makes no Profit from iTunes 451

Some Beech writes: "The Register has an article about the lack of profit from iTunes. Also mentioned in a Seattle Times article dated 27th October, it seems Apple is relying on iTunes to drive iPod sales rather then being a profit centre on its own." Another reader pointed us to Apple's details from the Analyst Meeting.
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Apple Makes no Profit from iTunes

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  • Hm... (Score:3, Insightful)

    by cgranade ( 702534 ) <cgranade@ g m a i l.com> on Friday November 07, 2003 @05:43PM (#7420765) Homepage Journal
    I wonder if anyone but RIAA makes money on this? Artists? Do the credit card companies make money on this? They probably make a mint! Methinks that Apple should be able to strong arm Visa a little into better rates on micropayments.
    • Re:Hm... (Score:2, Insightful)

      by Anonymous Coward
      Wow, you didn't read the article did you?
    • Re:Hm... (Score:3, Insightful)

      I'll be willing to bet they'll make a chunk of change off this service in the next year or two. What the article fails to mention is that this business model is an infant. It'll take Apple a little while to figure out how to get it organized and stream-lined a bit, then the profits will pour in.

      Once they are established, Visa will have no choice but to lower their charges. Once they get comfortable with that steady revenue, they'll bend over backwards to keep it.

      The "OMG IT'S NOT PROFITABLE?!" thing quit
      • Re:Hm... (Score:3, Insightful)

        Once they are established, Visa will have no choice but to lower their charges. Once they get comfortable with that steady revenue, they'll bend over backwards to keep it.

        Bullshit, to badly quote the matrix "they (the credit card companies) are the gatekeepers, they are guarding all the doors, they are hold all the keys". Visa/MC have every choice available to them. iTunes is dick to them, and they are everything to it. How many songs do you think apple is going to sell if people have to mail a money
      • Re:Hm... (Score:5, Informative)

        by bastion_xx ( 233612 ) on Friday November 07, 2003 @10:34PM (#7422437)
        Once they are established, Visa will have no choice but to lower their charges. Once they get comfortable with that steady revenue, they'll bend over backwards to keep it.

        I don't know who is processing on behalf of Apple for Visa/MC/etc, but I'm pretty it isn't them directly. Whoever is processing will have a few fees, negotiable with Apple. Other fee's won't be so negotiable.

        Apple is going to pay:

        1) Per transaction fee - the cost to send out the tx for authorization/settlement. Visa/MC's rates for doing this are anywhere from $0.015 to $0.03/per tx. Expect Apple's processor to add on an additional 1-5 cents.

        2) Discount Rate (or the magical mystical world known as interchange) - This is the ~2-5% merchants pay on the value of the settled transaction. If Joe User buys $100 in songs, Apple will get net settled minus the ~2-5% discount rate, minus transaction and processor fees. Depending upon how Apple deals with the transactions, such as using Verified by Visa (ala 3D Secure) or other anti-fraud devices can reduce the discount rate to about 150 basis points (or 1.5%).

        3) Chargebacks - This can be the real killer. If Joe User sees a charge for the iTMS he sez ain't his, he'll dispute the transaction with his issuing bank. Even if the transaction is valid, Apple is going to receive a "chargeback" or retriaval request. The fees charged to Apple for doing this can range anywhere from $0-25/per tx (that's dollars, not cents).

        How is Apple reducing these fees? I know in my experience that they group up a bunch of charges for settlement. This reduces the per transaction fee and still gives the cardholder an excellent invoice to reconcile against. This is probably the biggest in that if a user buys a single song per day at 0.99, Apple is probably paying the following:

        Authorization fee: 0.02 - 0.05
        Discount Rate: 0.02 - 0.04 (% based)

        So even in a best-case scenario for this transaction, Apple's looking at 0.08 out of the 0.30 "profit" after paying the RIAA members.

        In the grand scheme of things, today there is little incentive for Visa/MC to come up with a new business model for transaction fees. The good news is that things such as PIN-based debit cards, 3D Secure, and smaller transaction size (in dollars) will give them, or their competition, the push to come up with alternatives.

        Things such as mobile commerce, where the telco does the billing (and is good at "micro-payments" and monthly consolidation), digital cash, and chip-based stored value cards are some of the major avenues.

        For Apple, if they can get the buyers to buy more than 2-3 songs at a time, will significantly reduce their processing rates.

        IMO, obviously. :)
    • by Aqua OS X ( 458522 ) on Friday November 07, 2003 @06:17PM (#7421071)
      Remember, the RIAA is, more or less, a huge umbrella for the big record labels.

      It's the labels that make money. Not the stores, and (typically) not the artists.

    • by mikeswi ( 658619 ) *

      No guarantee that this is accurate.

      Source [downhillbattle.org]

      Apple says iTunes is "better than free" because it's "fair to the artists and record labels." That's simply not true. First of all, Apple gets 3 times as much money as musicians from each sale. Apple takes a 35% cut from every song and every album sold, a huge amount considering how little they have to do.

      Record labels receive the other 65% of each sale. Of this, major label artists will end up with only 8 to 14 cents per song, depending on their contract.

    • I wonder too.... (Score:4, Interesting)

      by sakeneko ( 447402 ) on Friday November 07, 2003 @10:38PM (#7422446) Homepage Journal

      Fact is, I never did do Napster, and never have downloaded music except for an occasional song off of a legitimate band web site. I didn't because I wasn't willing to take stuff and not pay for it unless the artist wanted to give it to me. So, until iTunes became available, I missed the digital music revolution almost entirely....

      And I LOVE IT. I love being able to buy and download exactly the songs I want -- particularly specific rock or pop or country songs I love by groups whose other stuff I don't much care for.

      I want iTunes to succeed. It's opened a new world to me. And if it doesn't make money, I wonder if it will stay around. <sigh>

  • by CokeJunky ( 51666 ) on Friday November 07, 2003 @05:44PM (#7420769)
    It strikes me that this is a rare version of the hardware/software business model.

    Normally, companies will take a loss on the hardware (i.e. x-box, nintendo, etc) and make up the loss on software..

    Oh well, whatever works for them.
    • Yeah, this is giving away the blades to sell razors (or giving away the film to sell cameras). Didn't Jobs take Business 101?
    • by goombah99 ( 560566 ) on Friday November 07, 2003 @05:52PM (#7420834)
      Apple has always lost money software as a driver for hardware sales. Do you really think they make money on Panther? they sell it for less than MS sells their OS and to a lot fewer people. Yet it (OBVIOUSLY) contains a lot more research and effort so their costs are much higher and profits not much on software.
      • by jared_hanson ( 514797 ) on Friday November 07, 2003 @07:13PM (#7421567) Homepage Journal
        Yet it (OBVIOUSLY) contains a lot more research and effort so their costs are much higher and profits not much on software.

        I don't know about this. I think a lot of the software development costs relate directly to the underlying OS. I've programmed extensively on Windows and Linux, and am just beginning on Mac OS X. However, OS X seems to be incredibly well designed and though out, making the programming process that much easier.

        It is much easier for Apple to develop applications for OS X than it is for Microsoft to Windows. Likewise, OS X's architecture is very clean, making it relatively easy to add new features. Windows, however is incredibly kludged together. Anyone who has developed on it can atest to that fact.

        Incidently, Steve Jobs addressed this very issue in the analyst meeting yesterday, which can be streamed off Apples QuickTime site. I forget the exact quote, but something to the effect that it is very easy to engineer new apps and features on OS X.
    • Umm, this is Apple. They've always taken a loss on software to drive hardware sales. Why do you think they don't sell the clearly superior OSX for x86 systems, where the OS itself could pose a much greater threat to MS than OSX for PPC only? The money, for them, is in he hardware, and always has been.
    • by Gumber ( 17306 ) on Friday November 07, 2003 @11:52PM (#7422697) Homepage
      Consoles are often subsidized at launch, but as hardware costs go down over the lifetime of the design, and R&D costs are recouped, the hardware starts to break even, or even turn a profit.

      I would take Jobs statements about the profitability of i-tunes with a grain of salt. He has lots of good reasons to "poor-talk."

      1st he has a good cover story for Apple shareholders, namely that iTunes is going to help bring in a lot of hardware revenue, with resulting profits.

      2nd he undermines iTunes competitors (and potential creditors) by sowing doubt among their investors and creditors. This reduces their wherewithal to ride out the uncertain early years of this new industry.

      3rd by undermining iTunes competitors, he strengthens Apple's position in the long run. As competitors falter, Apple can either acquire them, or scoop up their former customers.

      4th by undermining iTunes competitors, he strengthens Apple's hand against the recording industry. You have to believe that they want someone who can figure out how to get paid for on-line music distribution. And they haven't figured out how to do it themselves. It is in their interests for someone to succeed.

      5th he actually has the wherewithal to ride out the early days of the industry -- they are, in fact, making money on iPods, and the Apple Music store will probably help them sell more of them. As long as he's making a decent return on the hardware business, he can aford to keep the on-line music distribution business unprofitable. Once he's got it tied up, he can squeeze the recording companies.

      6th. Just as with console hardware, the economics of selling on-line music is bound to change. Apple has already done a lot of the R&D (and legal wrangling) to get this up and running. Those fixed costs will be paid off. Incremental costs will decline -- Moore's law will make the ongoing operation of the infrastructure cheaper as CPU and memory prices continue to drop. Storage and bandwidth prices will also drop. The market will grow, which means new investments can be amortized over a larger number of customers/transactions.

  • bullshit. (Score:3, Insightful)

    by edrugtrader ( 442064 ) on Friday November 07, 2003 @05:45PM (#7420774) Homepage
    if they can't make money at $.99 a song, then why are 20 companies popping up every week doing the exact same thing with no hardware business?
    • Re:bullshit. (Score:4, Insightful)

      by Carnildo ( 712617 ) on Friday November 07, 2003 @05:49PM (#7420819) Homepage Journal
      Remember the .com bubble?
    • OLD NEWS (Score:3, Informative)

      Uh, this is old news. It's not even news.

      The very day iTunes for Windows came out, I read articles about people from Apple saying they ran it with no profit and that it drove iPod sales. People linked to it in the last article!

      Thanks, Slashdot, for being FAR BEHIND as usual.
    • In case you haven't notice all the other companies that sell music, sell it for higher (average) prices, or offer premiums services, or sell the premium versions of their players (music match) or pay to burn CDs or they have lousy anti-consumer DRM.

      my guess is that apple pays a few cents more for the rights to offer a weaker form of DRM that benefits consumers. the others are probably trying to pocket a few pennies by skimming on consumer oriented drm.

    • Re:bullshit. (Score:5, Interesting)

      by mrpuffypants ( 444598 ) * <(moc.liamg) (ta) (stnapyffuprm)> on Friday November 07, 2003 @06:00PM (#7420913)
      Did you even live through the dot-com bubble? Do you remember when sites like Yahoo!, Excite!, and the other titans of ad-based revenues (or lack thereov) were huge for a while and had hundreds of other companies trying to do the exact same thing fully well knowing that revenues would be slim to none? And after a few years the only services left were the ones that made a real name for themselves, brokered real, money-making partnerships, or that sold their soul to the devil?

      That's exactly what I see going on here: We've got iTunes, MusicMatch, Napster, Wal-Mart, MTV, and the others on the horizon that are all going to enter into a market that their accountants probably would advise against but they still do it to try to get a foothold in a new and emerging market. Expect many of them to die off unless they get a viable business model to back up their technical requirements. Apple's got the iPod, Napster has their $9.99 subscription service, and the others have....

      It'll be interesting to see the Internet music bubble burst in a year or two. In the meantime I'll keep buying music from iTunes.
      • The sad thing is... (Score:5, Interesting)

        by cryptochrome ( 303529 ) on Friday November 07, 2003 @07:23PM (#7421624) Journal
        The sad thing is this is what it took to bring the recording industry kicking and screaming into the modern arena of digital music distribution. Apple can't make any profit for something with a lowered distribution cost relative to comparably priced physical media, and are forced to do so indirectly via a locked-in hardware device. I reckon if they could make a profit on the music, the price of the iPod would go down, it would support other services, and iTunes would support other players. If that isn't a pathetic indicator of the greediness and short-sightedness of the recording industry, I don't know what is. I kind of wish Apple hadn't invented iTMS, just so I could have watched the music industry die an ignoble death.

    • Why $0.99? (Score:3, Interesting)

      by rhizome ( 115711 )
      if they can't make money at $.99 a song, then why are 20 companies popping up every week doing the exact same thing with no hardware business?

      This has nothing to do with .com bubbles or selling players or anything. It has everthing to do with the RIAA industry wanting to maintain their outdated unit-price business model. Rather than using their imagination to figure out a subscription licensing model that would allow for a true celestial jukebox, they are forcing Apple to accept a price-per-download licen
  • by dougnaka ( 631080 ) * on Friday November 07, 2003 @05:45PM (#7420775) Homepage Journal
    Jobs has a good point they make their money off the hardware, it makes sense. iPods have to be 50-60% gravy, they're so freakin expensive.

    • If that was the case, then why doesn't Apple begin to support other music formats on the iPod that will help drive sales? Even if they support .wmv files, then all of the Napster, buymusic (both of them?), etc customers can buy iPods...
      • by hawkbug ( 94280 ) <[psx] [at] [fimble.com]> on Friday November 07, 2003 @05:49PM (#7420813) Homepage
        Exactly - if it were true that Apple's intentions were to only make money off the ipod, they WOULD support .wmv. However, they don't because they want CONTROL over online music distribution, and seem to be sacrificing a profit to get there. I supposet that's kinda like M$ and the Xbox.
        • Jobs said at the analyst meeting that Apple 1) doesn't want to promote a proprietary Microsoft format and 2) doesn't really see much need to support other music services as long as iTunes has 80% of the legal download market.
          • Right - I'm all about putting that M$ proprietary format out of business myself, but along the same lines, I would say the same about the ACC Apple format. Screw them both, when there are already acceptable formats available and widely used like MP3 and OGG. The fact remains though, is that if they were that serious about selling as many ipods as possible, they would support OGG and WMV to grab that other 20% of the market.
      • Because if they supported other formats, why would you pay twice as much for a crappy iPod and not pick up one of their competitors' products for much less? iPods only work with iTunes for a reason.
        • why would you pay twice as much for a crappy iPod and not pick up one of their competitors' products for much less

          you don't have an ipod do you? i shopped around for mp3 players for a long time, and nothing even compares to the ipod. especially hen coupled with itunes. it is the most thought out and ergonomically well designed player. period. it is worth the extra dollars. if it wasn't, then it wouldn't be the best selling mp3 player. it is also the most expensive, so apple must have done somethin
      • Look they already have 80% of the online sales. if they supported other formats at best they could pick up a few new sales. So why should they bother?
    • by costas ( 38724 ) on Friday November 07, 2003 @05:49PM (#7420815) Homepage
      I am surprised that no one yet has pointed out the ramifications of Jobs' revelation: a loss leader is an anti-competitive practice --it's actually illegal in a few countries, although nowhere in the US AFAIK. The fact that Apple can afford to sell songs for 99c/song because they make up their operating profits on iPod sales means two things:

      1. No company that does not sell hardware can afford to compete with those that do in the online music store business (i.e. Apple, Dell, Samsung kinda).

      2. The prices of the aforementioned units that subsidize the stores are artificially inflated by the amortized costs of the online music store operations, or expected growth. I.e. the iPods are indeed too expensive.

      Either way, this does suck. And it sucks because the magic price-point.
  • ummmm... (Score:5, Insightful)

    by TedTschopp ( 244839 ) on Friday November 07, 2003 @05:45PM (#7420780) Homepage
    I don't mean to sound rude, but wasn't this the business model all along.

    1. Create Cool player
    2. Distribute Content for cheap
    3. Become Standard by which everyone else judges you by.
    4. Establism market dominance
    5. Profit on Player!
    6. Raise price on Content or lower cost of distribution.
    7. Profit on Content!

    I don't seen anything new or mysterious there... And for the rest of you, you now have a couple more steps on that profit model you've been working on!

    Ted
    • Establism... Got to love quick typing and slow thinking. Always creates a lot of humor when you can't go back and edit it. Ted
    • 4. Establism market dominance

      Sadly, we all know Apple has never been good at this.
      1. Create Cool player
      2. Distribute Content for cheap
      3. Become Standard by which everyone else judges you by.
      4. Boost brand recognition and attract customer attention - (marketing)
      5. Profit on Player! ... and your other products!
      6. Profit on Beign a succesful company!
    • Re:ummmm... (Score:2, Interesting)

      by sql*kitten ( 1359 ) *
      I don't mean to sound rude, but wasn't this the business model all along.

      Yes, it's a variant on Netscape's business model. Their idea was, we will make money selling servers, but no-one will want servers unless there are lots of people with browsers, so we'll give browsers away for free. I believe the original analogy was "we sell printing presses but first we have to teach people to read to create demand for books" - Jim Clark or Barksdale, can't remember which.

      Apple just wants to get everyone accustome
      • Yes, it's a variant on Netscape's business model. Their idea was, we will make money selling servers, but no-one will want servers unless there are lots of people with browsers, so we'll give browsers away for free. I believe the original analogy was "we sell printing presses but first we have to teach people to read to create demand for books" - Jim Clark or Barksdale, can't remember which.

        Except that netscape screwed this up by not actually giving away the browser for free. They tried to charge money

      • Re:ummmm... (Score:4, Informative)

        by znu ( 31198 ) <znu.public@gmail.com> on Friday November 07, 2003 @06:11PM (#7421017)
        A few tens of dollars each? You haven't priced 1.8" FireWire hard drives, I don't think. I'm sure the profit margins on the iPod are pretty good, but they're probably in the 25-35% range, not the 1000% range.
    • Re:ummmm... (Score:5, Insightful)

      by Jason Earl ( 1894 ) on Friday November 07, 2003 @06:05PM (#7420970) Homepage Journal

      Even better, once the iTunes store becomes a major source of music for millions of folks then Apple can either

      1. Renegotiate with the record labels.
      2. Start signing artists themselves.

      The reason that the RIAA is so powerful is that for years they were the only way for artists to get their music into the hands of customers. Even now it is almost impossible to get yourself heard without signing a contract with a major label.

      If iTunes becomes a major outlet for music then Apple could very easily begin to finance and promote their own artists, and that's where the money is. Even better, instead of having to deal with Clear Channel to access thousands of separate geographic markets Apple will be able market directly to a large portion of the world.

      In short, turning a profit is not necessary at this point, hovering near profitability is perfectly acceptable. The fact that iTunes drives iPod sales is just gravy.

    • That was my reaction to the article. In fact, when iTMS was still being producded, didn't Apple say at one point that it was not their first intention to make some huge profit from the store? I vaguely remember this, but I could easily be wrong ):
  • Drive the sale of a piece of software/hardware/printer/whatever up by having a low price where you make no benefit, as long as you can recoup on software/hardware/ink cartridge. Rant or discuss as much as you want but as long as they make no loss either this is a good buisness model which sure as hell atrract probably more customer to them than anybody else in the download music market.
  • 99 cents a song? (Score:2, Insightful)

    by Detaer ( 562863 )
    So they are selling songs for 99 cents and they keep none of that? Where does all that money go? I know it doesn't go into the syringes of the musicians. correct me if I am wrong, but wasn't the internet supposed to put more money into artists pockets wtih all this "direct to customer" type stuff?
  • What about....? (Score:2, Interesting)

    What about the RIAA labels? Have they been making any profit?

    More importantly: How much have the artists made?
    • What I want to know about is the independent labels -- nothing's mentioned about who's making profit from those songs. And what about audiobooks?
    • The RIAA members are certainly making money. They always will. As for the artists, how much do you want to bet most of their contracts say things like "X dollars for every CD sold", not for every song sold?
    • From here [entertainm...online.com]:

      For Apple iTunes, the breakdown of the 99 cents typically goes as follows: 47 cents to the record label responsible for the purchased song, 34 cents to Apple Computer for managing the service, 10 cents to the artist of the song, and the remaining 8 cents to the song's publisher or songwriter.

      RIAA gets 47 cents. Aside from the typical production costs associated with CD sales, what more would it cost for Apple to peddle the RIAA's wares for them?
  • -1 flamebait (Score:5, Insightful)

    by Carnildo ( 712617 ) on Friday November 07, 2003 @05:47PM (#7420799) Homepage Journal
    The original article should be modded -1 flamebait -- too bad it's not on Slashdot. It's a rather impressive collection of loaded terms and inflammatory phrases.
  • With the hefty premium Apple pays to the Music Industry (TM) it's a wonder they make enough to cover their bandwith/maintenance costs. I'm surprised Apple couldn't negotiate a better deal with the RIAA. Then again, when has the RIAA been eager to embrace more effective (read "online") distribution medium to begin with?

    I just hope Apple will hang on to the store as a service to the people, so long as it can cover it's own costs. Up to this point it seems to be the most liberal in terms of DRM/user rights
    • With the hefty premium Apple pays to the Music Industry (TM) it's a wonder they make enough to cover their bandwith/maintenance costs. I'm surprised Apple couldn't negotiate a better deal with the RIAA. Then again, when has the RIAA been eager to embrace more effective (read "online") distribution medium to begin with? I just hope Apple will hang on to the store as a service to the people, so long as it can cover it's own costs. Up to this point it seems to be the most liberal in terms of DRM/user rights.

  • Good for them (Score:4, Insightful)

    by craigtay ( 638170 ) on Friday November 07, 2003 @05:49PM (#7420812) Journal
    They have created a brand that goes beyond Mac. Now they have Windows users using a Mac program! And Microsoft can't stop them! Even if they do break even they will see the profits when people see that they can actual program and switch.
    • Re:Good for them (Score:3, Interesting)

      by /dev/trash ( 182850 )
      Quicktime for Windows didn't make me want to switch to a Mac, and iTunes for Windows won't either.

      (Mac OS X might though)
    • Re:Good for them (Score:3, Insightful)

      by LuxFX ( 220822 )
      Now they have Windows users using a Mac program!

      So? Don't many Mac users use Word, Excel, etc.? Don't they use Internet Explorer? That's what really annoyed me about Steve Jobs' "it's the best Windows application ever" statement. It sounded so proud of there being a Apple product running on a Microsoft product, but forgot all of the Microsoft products running on Apple products.
  • by LetterRip ( 30937 ) on Friday November 07, 2003 @05:49PM (#7420818)
    Since realizing profit from a particular endeavor can be manipulated with extreme flexibility, claiming no profits could easily be a method to discourage competitors. ...Dear competitors, gee this is a tough and profitless market, that is absolutely not worth your time. Please pursue a profitable venture while we foolishly throw away our money, sincerely

    Steve Jobs

  • Funny how this is the opposite of what Microsoft did with the X-Box:

    Microsoft undercharges the cost of the hardware to increase software sales, while Apple undercharges the cost of music to increase hardware sales...

    I guess we'll have to wait and see which idea works in the long run.
  • But it also really applies.

    1. Invest millions in a huge infrastructure to sell songs very cheaply on the internet.
    2. ???
    3. Profit!
  • Wait a few years (Score:5, Interesting)

    by Dr_LHA ( 30754 ) on Friday November 07, 2003 @05:54PM (#7420863) Homepage
    OK - so they're not making money now. But wait a few years. Apple has put themselves in a good position to dominate the market with iTMS. In 5 years time when we're down to the few remaining successful iTMS type places, and the RIAA/Record companies have become hooked on the revenue stream from these sources, Apple et al. will be in an excellent position to renegotiate with the RIAA for a bigger piece of the pie/profits.
  • by sterno ( 16320 ) on Friday November 07, 2003 @05:54PM (#7420866) Homepage
    Right now the power here is in that hands of the music industry because most of their music is still sold through the traditional channels. If they didn't feel like selling through ITunes, they could do so with little pain.

    Where it gets interesting is when on-line distribution does become the primary distribution mechanism, the music companies are going to lose their power because they no longer hold the keys to the kingdom. Why would an artist sign a deal with Warner or Sony when they could sell music directly to Apple and take home more money?

    The failure of the music industry to make a palatable alternative that they can control will be their demise.
    • by Knife_Edge ( 582068 ) on Friday November 07, 2003 @06:06PM (#7420980)
      Well, I can say that in their current position, it looks like record companies can ensure that online music distribution never becomes the main distribution medium. They are the ones setting the prices at which the music must be sold. As soon as the 'middle man', in this case Apple, starts getting too powerful, all they have to do is raise the cost of the music to Apple, thereby starving them of money. The whole point of the article is that Steve Jobs is just offering his company up for slaughter by the record companies. Apple will never become the primary provider of content if they have to compete with the record companies on their terms.

      Now, whether this will actually happen, I dunno. I think Apple's strategy is a little more short term than this...
  • by Llywelyn ( 531070 ) on Friday November 07, 2003 @05:59PM (#7420905) Homepage
    Apple's strategy is simple, but counterintuitive if you are used to thinking of things separately.

    Apple has had a dramatic increase in the number of sales of the iPod and have established market dominance with the iTMS. It /might/ not be sustainable, but over the long run will break even as their costs go down. Where they make money on this deal is in the sale of the iPods, which cuts the sting of loss by a good bit. Their hardware is cheap (they get XServe RAIDs at cost) and long term expenses seem to be (relatively) low.

    In short, they are taking a business risk. its a business risk, but the potential for gain is good (by being first to market, having the best mindshare, and having a secondary product which will make money), and I am positive that I would call it "potentially fatal" or reckless, which is what the Register seems to imply.
  • by fermion ( 181285 ) on Friday November 07, 2003 @06:00PM (#7420916) Homepage Journal
    Only in certain circumstances is it useful for a company to admit that makes money in a particular area. As see in movies, music, and sports, the firm will almost always structure the accounting so that money is lost in certain strategic areas.

    In the case of Apple they certainly have development costs, equipment costs, bandwidth costs, etc. And they are certainly accounting for those costs in such a way to make sure that no profit is seen at the ITMS. For instance, iTunes, which was previously a perk of the OS, can now be funded by the ITMS.

    Apple would want to do this for two main reasons. First, a highly profitable music store might invite more competition. Second, as download sales increase, they will likely pressure labels to give Apple more of a cut. This will be easier to do if the music store regularly loses money.

    I expect the general media to miss such observation. What is funny is when the like of Fortune and the WSJ does not account for such factors.

  • by ejaytee ( 186527 ) on Friday November 07, 2003 @06:01PM (#7420919)

    What an absurd article.

    Apple has a product (the iPod), upon which it makes a lot of money. Apple creates a system (iTunes and the iTunes store), whereby it can drive more sales of its product.

    Now, I am supposed to be upset with Apple because it doesn't make money providing the media service, and it cooperates with the RIAA's licensing demands to do so.

    Furthermore, I am supposed to prefer the idea of a 1-cent tax on my blank CD, or an addition to the income tax.

    The mind boggles. Who should administer the income tax disbursements? How should the money be allocated? By volume? To promote a social musical agenda? Why should my CD carry a surcharge if I only want to burn a Linux distro, or back up my stuff onto it?

    DRM is a big problem, sure, but this offers no answers. Apple is trying to build a dominant brand in the digital media distribution business, and doing well at it. For now, to offer the digital media that people want, Apple must deal with the gatekeeper to those media. That gatekeeper is the RIAA. Perhaps that will change someday and Apple or somebody else will be able to make money. For now, it seems reasonable enough to me that Apple is providing a service in the only manner in which the service can be realistically provided, and positioning the traffic and customer base to equate digital media with iTunes for the future.
  • This is old news in investment forums, where people quickly figured that the impact on the top line would be small, and in the bottom line darn near zero. Most of the money ($0.75 to be precise) goes to the artist/copyright holder, another chunk goes to the record company and Apple is left with about $0.10 measly cents per song or just about enough to pay for the bandwidth required. They don't seem to be losing money either, so it is not a loss leader.

  • Lots of negative press regarding iTunes today.

    The reality is Apple makes damn nice software .. and once you have used it you realize how shitty Windoze software is ..

    I even find that M$ Office for OSX looks and feels nicer than the Windows version ..
  • It's called 'creative accounting'. After all the MPAA claims that Spiderman made no profit and it was one of the highest grossing movies in the past few years, but it didn't make a profit. Apple probably took some lessons from the ??AA on how to do the accounting so it doesn't make a profit.

    However, I guess it's also possible they are still recovering their fixed expenses to setup the network so they aren't profitable _yet_.
  • by CaptMonkeyDLuffy ( 623905 ) on Friday November 07, 2003 @06:04PM (#7420953)
    Reading the article at the Register... it sounds like they're blowing things out of proportion. The quote from Jobs that they focus on is: "We would like to break even/make a little bit of money but it's not a money maker."

    While this could mean they are taking a permanent loss, it could also mean it is a slow profit that hasn't quite surpassed the initial one time investment portions of setting up iTunes... Or, it could even mean that they do break even or make a very small profit, but the profit is so small that in the large picture of the companies profits it comparatively makes no money...

    I'd want to see some actual numbers and the real math before coming to any conclusions... The article simply jumps from the quote that iTunes isn't "a money maker" and enters areas of rampant speculation, leaning a little in the tinfoil hat direction.
  • by ryanw ( 131814 ) on Friday November 07, 2003 @06:04PM (#7420958)
    Steve jobs has said It starts with the music and ends with the music. [macdailynews.com] The interesting thing is, if it's really about the MUSIC doesn't that mean it's also about the artists? I personally know an artist [apple.com] that has stated they make only $0.01 per song sold on the iTMS. His last months check entailed less than $1.00 from songs sold on the iTMS. $1.00 per month for a whole year doesn't add up to much.

    If this becomes more and more popular and radio stations play less and less commercial music, these "professional musicians" will end up even more broke than they already are. Radio play is the bulk of the artists paychecks.

    • The problem is that your artist friend has a sucky contract with a greedy record label. This is true of most artists, especially if they never make it big. Even large artist make more money on concerts, promotionals, etc., than they do on album sales, unless they had a shark lawyer looking out for their best interest at the get-go.

      Artist on major labels still receive whatever percentage cut they would normaly received based on their contract with the label. This has absolutely nothing to do with Apple, sin
  • by VoxBoston ( 670308 ) on Friday November 07, 2003 @06:06PM (#7420975)
    Here's my take on it: A bunch of Indie lables and CD Baby (umbrella for lots of tinier labels and individual artists) are going to have their content on iTMS soon.

    This is good for Apple - I suspect they're able to keep a higher percentage of the $.99 on those sales. Less RIAA strong-arming, less "fuck you - we're the Rolling fucking Stones" negotiating pressure.

    Perhaps the mainstream content is a loss leader to sell iPods (good plan), and the vast ocean of indie content will actually be profitable in its own right.

  • Yes, Apple still bows to the RIAA. But I think that's just for now. They may be propping the RIAA up right now, but their days are still numbered. If an artist can go 'independent', sign up with a label like CDBaby, and still get their music on the iTMS, they'll probably gravitate to that over time. Even if they make no more money than before, they'll keep the rights to their music, which is worth a lot to them.

    Trying to turn the world upside down on its head wouldn't have worked...it DIDN'T work. You have
  • Step 1: Online music (Score:3, Interesting)

    by SheldonYoung ( 25077 ) on Friday November 07, 2003 @06:09PM (#7421000)

    Step 2: Make your online music service the de facto standard so record companies will reduce your cost to a reasonable level.

    Step 3: Profit

    Right now Apple is paying way too much per song. It's probably the concession they had to accept in order to sell the music online. However once iTMS becomes The Place to Go for Music, if it isn't already, Apple will no longer have to accept such crazy prices. When that happens the service will be making a profit, and probably a healthy one at at that.
  • by eggboard ( 315140 ) * on Friday November 07, 2003 @06:14PM (#7421044) Homepage
    I write a regular newspaper column about the Mac for The Seattle Times, and had a briefing with an Apple iTunes product manager back in mid-October. I asked whether there would be an affiliate model with iTunes in which referring visitors to specific albums or songs would generate a commission.

    The product manager said very clearly, on the record, as he and other Apple people have over the last several weeks, that the margin is razor thin with iTunes, and that they're running the service in order to sell iPods and encourage people to use Macs. They believe that the artists make money on the deal (how much is another issue), and that because they're selling so much related hardware, that's their real business.

    So there's no real story here. Apple hasn't been hiding the fact. I mean, this is a low-margin business anyway. Say Apple was charging $1.09 per song and netting 10 cents each. If they sold 10,000,000 songs per month that would be an extra $1 million. Big woop. So it's better for them to keep margins low and sell their very high-margin hardware.

    I can't tell you the number of friends who went out and bought new PowerBooks and iPods recently -- the iTunes store just flipped them out and they gave up their old PC laptop. The music will give Apple a larger hardware marketshare.
  • Impractical (Score:5, Insightful)

    by acone ( 696157 ) on Friday November 07, 2003 @06:20PM (#7421100)
    The idea of compulsory licensing seems at first glance like the perfect marriage of government and the marketplace: artists are amply rewarded, demand dictates how much musicians get paid, and anyone, regardless of wealth, has equal access to information.


    But there are serious problems that will prevent this from happening, however wonderful it might seem:


    1) Different people listen to different quantities of music. Someone who downloads 500 songs per year will therefore make the government pay 500 times as much money to the artists than the guy who only downloads one song. If I were that guy downloading one song, I'd not be too pleased about paying for some guy I don't know to listen to some artist I might not even like.


    2) If there is no cost incurred to the user for downloading a song, many people will download huge numbers of songs, many of which will simply get thrown away. A song with an attractive name might get many downloads, even if no onne likes it. A corollary problem is that of bots being used to increase an artist's download quantity, and therefore unfairly make him money. There is, of course, no 100% reliable way to distinguish between a bot and a human.


    3) There would be no way to track exchange of songs. If the songs have no DRM-like restrictions, than I can give a copy to my friend, an no one will no about it, so the ratings won't increase correspondingly. Even with the most advanced statistical methods, it is not possible to know just how many copies of a song have been made unless one actually does a study for each song (different songs that appeal to different demographic sectors will be copied more or less, etc). The only solution to this would be to somehow institute a mandatory reporting system, by which the federal government would know each time a song changes hands... but I'm sure such a system would not appeal to all you anti-DRM folks, as it could concentrate a frightening amount of personal information in the hands of the government.


    4) What about international downloads? Would this just be the US government funding this with US taxpayer dollars? Or a consortium of countries? But what if one country downloads more music than another, and how do we farily assess which countries download what? Frankly, it'd be hard enough to get the US government to implement such a scheme without making it suck incorrigibly; I certainly can't imagine UNESCO, the WTO, or another international body doing it.


    5) Even though distribution costs are small on the internet someone still needs to supply the servers from which songs are downloaded before they are shared. As it would be impossible to do this profitably when one could just get the songs from a P2P service, this too would have to be run with taxpayer dollars.


    6) Most people of the free world--especially Americans--are mistrustful of the government interfering in markets, especially when it come to effectively monopolizing information markets as public goods. This belief is certainly not just superstitious, and it prevails regardless of how noble the intent of such schemes. Therefore, it would be damn hard to drum up popular support for such an initiative.


    Conclusion:

    The arguments above are just one example of how totally free exchange of intellectual property simply can not provide the producer with fair compensation. The idea is almost a contradiction itself. In economists' language, the Internet provides us with the power to treat what is still a scarce economic good as if it were a free good--ie, common property. Yet the Tragedy of the Commons remains painfully relevant: in the end, someone has to pay.


    --AC

  • by jared_hanson ( 514797 ) on Friday November 07, 2003 @06:24PM (#7421139) Homepage Journal
    Well, in this case not RTFA has degraded what could be an interesting debate on Slashdot.

    So, for those of you who didn't take the time, the author of the article seems to suggest that creative works will be payed for by taxes. By paying the taxes, we will all legally be able to download and share at will. He also suggests that this is the accepted and expected outcome by those in the know.

    First off, I have never heard this point ever seriously considered. If it is, however, I am incredibly concerned. Do we really want creative works to become a socialist venture? What happens when artists sing controversial music, especially that which goes agains the thinking of the government? Would the government just revoke their payments? What would the US have done in the 60's if it was footing the bill for both the Vietnam war and the artists who were crying out against it? What would foriegn governments do?

    I'd rather keep music in the free, open market so I know there is no pressure on squashing dissident views from artists. Artists have historically brought about the greatest changes in thinking. This would be much tougher in a creative-socialist market.
  • The RIAA on iTunes (Score:4, Interesting)

    by Crispen ( 52264 ) on Friday November 07, 2003 @06:31PM (#7421222) Homepage
    And to add insult to injury, RIAA's Carey Sherman (at yesterday's Educause roundtable in Anaheim) took a backhanded stab at iTunes claiming it was an "old business model." [One of the new business models he mentioned was an iPod loaded with locked music files -- you pay to unlock each song.]

    Sherman's happy to be selling to Apple, but what I gathered from both him and Jack Valenti is that the RIAA and MPAA are hoping to one day force all of us into a utility pricing model. If you pay the monthly fee, your songs and videos will play. Skip a monthly payment, however, and all of your music and videos lock up tighter than a coon dog full of 12 pounds of government cheese.
  • by peatbakke ( 52079 ) <peat@peaCOWt.org minus herbivore> on Friday November 07, 2003 @06:58PM (#7421466) Homepage
    [note: I'm going to pull a lot of numbers out of my ass for this post, but it should, at the very least, help you grasp the magnitude of the iTMS business.]

    Several people have pointed out that Apple's slice of the pie is 34 cents per download ... that's after the RIAA, credit card companies, and music labels get their cuts.

    Last week people downloaded 1.5 million songs from iTMS. That breaks down to about half a million bucks in revenue, per week, give or take a smidge.

    Lets see where that money goes:

    - People! The big money burners. If the average salary of a person working in the iTMS department is $60k (a tad high, I think), it would take 400-something employees working exclusively on the iTMS project to eat up all that cash.

    - Hardware! Well, they probably have a nice contract with Akamai for content distribution, and/or fat pipes at some fancy data centers (think Exodus/C&W). If they're payin' $2M a year for iTMS hosting services alone, including hardware and what-not, that's about $40,000 per week. It could be double that, it could be half that. Hard to say, but I have a hard time thinking it would eat more than 20% of their weekly revenue ($100k).

    - Development! iTunes for Windows and Mac ... exciting stuff, but I think most of the expenses here can be rolled into the people section above, and the initial investments below.

    - Advertising. Hard to say how much advertising costs, because they're "integrating" iTMS ads with all their other campaigns too: iPods, iMacs, and other iDoodads. Hmm. Lets say they're dropping $5M over the course of a year to promote iTMS, in addition to everything else .. that comes out to about $100k per week.

    - The initial investment. This is probably why they're not "profitable" yet. Getting iTMS off the ground with that much content and usability testing probably put a dent in the war chest (which still has a few billions in it).

    So, looking at this on a weekly basis: people (~200k), infrastructure (~75k), and marketing (~100k) ... we've accounted for about 75% of the revenue generated by those itty 34 cents per song. The other 25%, or $125,000, gets shuffled back into a bank account to repay the initial investment. At the current rate of 1.5 million songs per week, that's about 6.5 million bucks in a year.

    This is, of course, before the big promotions kick off, and before the Windows market embraces (maybe) iTMS.

    I think the future is bright for Apple, and the notion that they're not going to make any money on iTMS is ridiculous, as is the idea that iTMS is merely a prop for the iPod.

    ---

    So, considering my disclaimer at the top, I'm VERY keen to hear what other people think of these estimates. Did I miss anything big? Should I have gone to bed an hour ago?

    Cheers!
  • by whorfin ( 686885 ) on Friday November 07, 2003 @07:09PM (#7421538)
    They make albums so they can build demand for concerts (the record companies take most of the album profits), and then they make money on concerts.
  • by Psychic Burrito ( 611532 ) on Friday November 07, 2003 @07:39PM (#7421688)
    The Register, normally quite a good source of unbiased news (if you're not microsoft, that is..) has really spinned Jobs' words around a lot. I've listened to the whole analyst meeting by myself, and this was all said in a context about the competitive situation. The punchline was not "we're unprofitable here", and it wasn't either "we're trying to cover our costs with the iPod".

    What was said is that the competitive landscape is very challenging, and by being the largest store and having all this infrastructure up, might end up gaining a small profit in a few years. Right now it's time for investing, but sometimes it might pay off. And the punchline was that Apple might end up gaining a small profit while the competitors, lacking many part of the infrastructure, will not even gaining some profit in any foreseeable future.

    There you have it. Completely different context. You can hear Jobs' words by yourself, the audio of the analyst meeting is online [apple.com] (it's the Q&A part, all in glorious quicktime).

  • by amichalo ( 132545 ) on Friday November 07, 2003 @09:01PM (#7422085)
    Listen to what Jobs said - at $0.99 per song, you can only breakeven at this business. He is talking to analysts, analysts who are also gonna talkto DELL, Wal-Mart, MTV, Napster, et al. Jobs didn't say it's a loss leader, he just said it isn't very profitable and basically breaks even.

    (Now, add volume on the order of magnitude of 80% of all music sales, not just on-line...and you have a position of strength to negotiate all your direct costs, an economies of scale for your indirect ones - but that's another econ lesson)

    So he is casting FUD onto the longevity of those competitors. What is also important to note is that NONE of those services work with the worlds #1 ... iPod. They do all work with a myriad of competitors and they themselves all compete with a comodity product - the WMA music file.

    Now listen up - this is important - the WMA music file is a comodity because if it costs $0.99 from Wal-mart or MTV or Napster or DELL, then why should I buy it from any of them? They will either have to add value to it by making the shopping experience easier, or lower the price. Assuming it can't get easier than 1-click shopping (Apple and Amazon exclusives) or rich browsing/searching content of which most services have, then that leaves price.

    Which brings us full circle - if WMA music files are comodity items that can only compete on price, and if at $0.99/song, a music store isn't significantly profitable, than prices will drop until the competition goes out of business.

    That is what Jobs said.
  • Let's think about this for a moment and puzzle out why Apple might be willing to have iTunes Music Service be a loss leader right now.

    Now, most folks thinks this is so that they can sell iPods. And while I think this is probably part of the reason, I think there are other reasons.

    In fact, it could be argued that the zero margins on iTunes Music Service and the margins on iPods are part of a long-term investment in an even bigger business.

    And what might that long-term investment be?

    Think about this: currently the RIAA are the gatekeepers to the great libraries of music. They have the talent and content that matters under their control If you are going to get to the music which drives traffic and deals, you have to cut the RIAA in for a piece of the action.

    But the RIAA is caught in the fantasy of maintaining a business model which is broken and won't settle for a piece of the action which is less than what they are getting now.

    So, you have to make a deal with the devil. You have to give the RIAA a deal which is economically unsatistactory in order to get any deal whatsoever.

    Of course, if you have another source of revenue with decent margins, this isn't really all that bad for you. You can give away the blades in order to sell the razors and to establish yourself as the defacto standard. Sound familiar? And you are able to do this without losing money in the process.

    Of course, the next time Metallica's or Sting's or Byonce's contracts are up for renewal if they have a savvy business manager, they are going to look at their sales distribution and maybe notice the fact that they are paying a lot to the RIAA to essentially collect a check from Apple, cash it, and then write a check to the artist in question.

    How long do you think it will be until some major name breaks ranks and decides to negotiate a contract that cuts the RIAA out of this portion of the distribution scheme and then cut a deal between themselves and Apple?

    Once a single name does it, they dam will be broken and the flood will start. Apple will be able to increase the major it gets on each iTune sales and the artists will be able to increase their cut of each song. It will be a win-win proposition for the Artists and Apple, and the RIAA will quickly be relegated the position of being the CD distribution business.

    In this play, Apple, the Artists, and the Consumers win, and the RIAA and Microsoft lose. Makes you understand why Microsoft has been attacking iTunes for Windows and the iPod so strongly...

    Yours,

    Jordan Dea-Mattson

"Inquiry is fatal to certainty." -- Will Durant

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