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.
Hm... (Score:3, Insightful)
Re:Hm... (Score:2, Insightful)
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.
The "OMG IT'S NOT PROFITABLE?!" thing quit
Re:Hm... (Score:3, Insightful)
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:3, Informative)
All the bank does is issue you the credit line associated with your credit card. They make their money on interest and service fee's charged to the CARD HOLDER.
Visa/MC make their money by brokering the transaction and charging the VENDOR a percentage (2-5%). It's this vendor service charge that eats apples profit. And again, if you think they will deal with Apple on the charge, think again. They don't deal with WalMart, why would they deal with s
Re:Hm... (Score:5, Informative)
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.
The RIAA doesn't make the money (Score:4, Informative)
It's the labels that make money. Not the stores, and (typically) not the artists.
Re:11 out of 99 cents (Score:3, Interesting)
No guarantee that this is accurate.
Source [downhillbattle.org]
I wonder too.... (Score:4, Interesting)
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>
Theres an industry turn around for you (Score:5, Interesting)
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.
Re:Theres an industry turn around for you (Score:2)
Re:Theres an industry turn around for you (Score:5, Insightful)
Re:Theres an industry turn around for you (Score:5, Insightful)
is there any way (Score:3, Insightful)
It would save us all a lot of time.
Re:Theres an industry turn around for you (Score:3)
No that's how apple always made its money (Score:4, Insightful)
Re:No that's how apple always made its money (Score:5, Informative)
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.
Re:No that's how apple always made its money (Score:4, Interesting)
Thank you, I'm not. Although QuickTime is indeed primarily a digital video standard, it also includes a complete Mac OS-like operating system API in it. Indeed Carbon was originally based on the QuickTime for Windows code base - we ported QTW to Rhapsody and voila, there were the Mac OS classic APIs.
Apple may have intended Carbon to be used for legacy applications, but plenty of new apps are using it. For programmers familiar with classic Mac OS programming, its a much easier leap to Carbon than Classic, so a lot of them develop code using it.
Re:No that's how apple always made its money (Score:4, Interesting)
Re:No that's how apple always made its money (Score:3, Insightful)
Good point.
I have to wonder what the RIAA/Artist cut of that $0.99 is, because I am suprised that they aren't making at least some profit off of the music sales. I gather that the users seem to like the interface, so I suppose when they say no profit, they really mean that it will be a long time before the capital costs that went into building iTunes pays off. As you pointed out, however, Apple is a patient company, and recognises that style and function have to work together to make good products.
None
Re:No that's how apple always made its money (Score:3, Interesting)
Before you flame, I'm not contending that MS makes a better OS, I'm contending that their product contains more research and effor.
Re:Theres an industry turn around for you (Score:3, Insightful)
Re:Theres an industry turn around for you (Score:4, Interesting)
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)
Re:bullshit. (Score:4, Insightful)
Re:bullshit. (Score:3, Funny)
OLD NEWS (Score:3, Informative)
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.
The other bussiness models (Score:2)
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)
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)
Why $0.99? (Score:3, Interesting)
This has nothing to do with
Hardware is where they make their money.. (Score:3, Insightful)
Re:Hardware is where they make their money.. (Score:3, Insightful)
Re:Hardware is where they make their money.. (Score:4, Insightful)
Re:Hardware is where they make their money.. (Score:2)
Re:Hardware is where they make their money.. (Score:2)
Re:Hardware is where they make their money.. (Score:2)
Re:Hardware is where they make their money.. (Score:3, Interesting)
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
Uh because it would not spur sales (Score:2)
Re:Hardware is where they make their money.. (Score:5, Insightful)
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.
Re:Hardware is where they make their money.. (Score:2)
Re:Hardware is where they make their money.. (Score:4, Informative)
Re:Hardware is where they make their money.. (Score:2)
The ipod is NOT THAT EXPENSIVE.
If you actually compare the price per megabyte with other hard-drive based players, the ipod does very well.
And originally it was the *only* hard drive based player. It has consistently been the most feature rich, best designed mp3 player with the most storage. Of course I think I am going with one of the cheaper SD card based mp3 players, but I still say that the ipod is the best one for the money and the best one period. (I just don't need that kind of horsepower and
Re:Hardware is where they make their money.. (Score:2)
ummmm... (Score:5, Insightful)
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
Re:ummmm... (Score:2)
Re:ummmm... (Score:2)
Sadly, we all know Apple has never been good at this.
less conspirationist scheme (Score:2)
Re:ummmm... (Score:2, Interesting)
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
Re:ummmm... (Score:2)
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)
Re:ummmm... (Score:5, Insightful)
Even better, once the iTunes store becomes a major source of music for millions of folks then Apple can either
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.
Re:ummmm... (Score:3, Interesting)
Besides, not that Apple will "sign" artists. But artists might be able to make their work available (either non-exclusively, or exclusively for a short time, as is already happening) through ITMS.
Re:ummmm... (Score:2)
It makes sense. (Score:2)
99 cents a song? (Score:2, Insightful)
Re:99 cents a song? (Score:2)
Breakpoint? (Score:2)
What about....? (Score:2, Interesting)
More importantly: How much have the artists made?
Re:What about....? (Score:2)
Re:What about....? (Score:2)
Re:What about....? (Score:2)
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)
Makes sense (Score:2)
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
Re:Makes sense (Score:2)
Re:Makes sense (Score:2)
Good for them (Score:4, Insightful)
Re:Good for them (Score:3, Interesting)
(Mac OS X might though)
Re:Good for them (Score:3, Insightful)
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.
Tactic to discourage competitors (Score:3, Insightful)
Steve Jobs
Opposite of Microsoft (Score:2)
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.
Obligatory... (Score:2)
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)
Re:Wait a few years (Score:2)
Wanna start a business?
Interesting possibilities... (Score:5, Interesting)
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.
Re:Interesting possibilities... (Score:4, Insightful)
Now, whether this will actually happen, I dunno. I think Apple's strategy is a little more short term than this...
Review is Surprisingly Negative (Score:3, Insightful)
Apple has had a dramatic increase in the number of sales of the iPod and have established market dominance with the iTMS. It
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.
profit and loss is relative (Score:3, Insightful)
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.
Shortsighted and cynical (Score:5, Insightful)
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.
Shareholders knew that (Score:2)
hmm .. (Score:2)
The reality is Apple makes damn nice software
I even find that M$ Office for OSX looks and feels nicer than the Windows version
Not surprising (Score:2)
However, I guess it's also possible they are still recovering their fixed expenses to setup the network so they aren't profitable _yet_.
Blown out of proportion? (Score:5, Insightful)
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.
Funny, Artists Make no Money Also (Score:3, Interesting)
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.
Re:Funny, Artists Make no Money Also (Score:3, Informative)
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
Re:Funny, Artists Make no Money Also (Score:3, Interesting)
The Indie content is the secret weapon for Profit. (Score:3, Interesting)
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.
The RIAA is still on the way out (Score:2)
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)
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.
Apple told me this in a briefing weeks ago (Score:5, Informative)
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)
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
Comment after reading the article (Score:4, Insightful)
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)
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.
How To Spend Heaps of Money (Score:3, Insightful)
Several people have pointed out that Apple's slice of the pie is 34 cents per download
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
- 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
- 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)
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!
Just like the musicians (Score:3, Interesting)
What actually was said it quite a different thing (Score:4, Insightful)
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).
Aren't /. readers smarter than this? (Score:5, Insightful)
(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
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.
Jobs crazy? Yes, crazy like a fox... (Score:4, Insightful)
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
Easy... (Score:2, Interesting)
Re:you're right on one point, anyway (Score:2, Informative)