by Clyde Smith
When iTunes began it was designed to make money for Apple via the sale of iPods. So the assumption since then has always been that Apple doesn’t make money off music especially since Apple has long presented iTunes as a “break-even” proposition.
An upcoming report from Asymco estimates that Apple is doing quite well off sales via iTunes though it’s the software that is likely to be generating the most revenue.
In an excerpt from an upcoming report, Horace Dediu estimates the “Gross iTunes Revenue by Media Type” (click on above thumbnail for full chart) and compares that to the estimated cost of operating the iTunes store.
“At break-even the cost of operating iTunes stores would be about $3.75 billion. It’s hard to imagine this level of operational expense for digital content.”
“For this reason, management has begun since 2010 to suggest that at least the App Store is run ‘a little over break-even.’ How little is a good question. A one percent operating margin (from gross revenues) would imply as much as $45 million margin. I estimate 2% is possible on Apps and 1% on Music.”
“That’s $150 million in margin content.”
He goes on to point out that Apple software offers much higher margins and that’s where the real revenue lies.
So it’s worth noting that music may not be a huge profit center but it was definitely used to establish iTunes in the lives of consumers. That has made it an effective base upon which Apple has built its store for content and software.