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iTunes has paid over $2 billion to app developers and $12 billion to record labels

The last analysis of the iTunes content store showed amazing acceleration in download rates. Since we know something about the pricing of apps in aggregate, we can make some guesses about the income from apps for both Apple and suppliers.

The key assumptions are:

  1. Average selling price per app $0.29 (as reported in June 2010 here).
  2. Price per song $.99 increasing to $1.05 over time
  3. Music gross margin 10%
  4. App gross margin 30%

The first chart shows the accumulated payments made to suppliers of content to the iTunes store over time.

Although the music suppliers received in aggregate much more than developers, the iTunes store has been open much longer. When comparing sales acceleration, the App store is ramping faster having paid out $2 billion in 31 months vs. 34 months for the first $2 billion paid out for music.

My guess is that a follow-the-money analysis would show that apps as a medium will absorb talent and capital away from existing mediums and the industries they support.

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  • rattyuk

    Full stop missing in second bullet point. $.99 per song not $99. Apple are made of money but they can't give it away.

  • Davel

    Wow

  • CndnRschr

    There is an interesting living experimental comparison being made between income from paid apps on iOS, free (ad-supported apps) on iOS and free (ad-supported) apps on Android. Each model has different dynamics such as commitment of the user in a paid app vs an ad-supported app or discovery rate (the former is stickier for paid apps and the latter is higher for ad-apps). Ad-supported apps are dependent on advertiser rates which are themselves dependent on many variables. Ad income is also relatively low but more persistent than up-front payment. In a growing market, both models are feasible (in-app purchases extend the period of income too). As markets stagnate or head lower (in terms of handset pricing), the dynamics will change. Do app developers prefer one or the other or are they hedging? Clearly, it depends on the app but it will be interesting to see how this evolves.

    • Marcos El Malo

      Don't forget the in-game-purchase model. I was a bit skeptical of this myself, but tried a recommended free app (with in-game purchasing of tokens to be spent on different areas or better gear). I liked the game so much that I bought the paid app, which didn't have this in-game economy. You know what? Even without purchasing any tokens (which can also be earned, albeit slowly), I prefer the free app.

      Oh, the free app does include advertising, while the paid does not. But I still find the free app more fun. I'd be very curious as to which version is earning the developer more money.

  • Marshall

    The other side of this is that
    Apple has made $1.33B selling other people's music, and $850M selling other people's applications.

    • asymco

      That would not be correct if "made" means "profit". The iTunes store is run at break-even, so that implies that the gross margin is spent on operating expenses.

    • Pieter

      @Marshall
      How much money do other shops make on items produced by other people?
      E.g. Amazon? Or Wallmart? Or the Android Market? Why is that never a problem, but suddenly when it is 'Apple' it is?

      Don't forget the 30% covers costs made by Apple, such as creditcard costs, servers, etc.
      Also, free Apps are 'free' for the buyer, but they do cost money to Apple.
      Apple claims the stores are about break-even…

      When the App Store started, a lot of developers were very happy with their 70% split, as the normal developer split would be more like the 30%!

      • Horace the Grump

        You would have to assume that the server farms used to run this system are pretty large and impressive – I wonder what the power bill is each month? When Apple starts building power stations to manage its power costs I guess we will find out! :-) !!

        I don't see very much chat about developers complaining about their share of the cost, and Apple does provide all of the same infrastructure for free apps as it does for paid apps…

        I'd love to see the financials on the App Store and iTunes in general…

  • FalKirk

    This kind of explosive growth in Apps makes me wonder whether Apps may become more than they are today. Today, I naturally think of Apps as small applications only. But many Apps are also books. Is it possible that in the future people will routinely distribute their research papers or lectures or songs in the form of Apps? And are there other uses which have not yet emerged but will as the App process becomes ever more routine, ever less expensive, and ever more ubiquitous?

    If we stop thinking of Apps as applications and start thinking of them as content delivery vehicles, their possible uses expand enormously.

    • CndnRschr

      Excellent point and a fine observation! This may well transpire as the AppStore (and iBooks) model has built in discovery and referencing capabilities (as well as discovery). What would be needed would be some sort of quality control indication (to sort the wheat from the chaff, highlight the most interesting content, etc). The problem though, is that there are multiple systems (stores) and these are tied to devices (operating systems). Perhaps this is trivial though since the same is true of a music track (and an ebook) and we have no accessibility problems – just a choice of where to buy/download from and on what device to view it. Will Apple/Google be content to store the content? Probably – given that it’s a means to increase the utility/desirability of their devices.

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  • Sandeep

    2 billion dollars over 3.5 years after iphones was announced seems quite low.

    • asymco

      The store was launched about 1 year after the iPhone was launched, so the time frame is about 31 months. But I'm curious what frame of reference you use to define high or low.
      The frame I put forward is the payments to music labels and I showed that the payments to developers has been growing more rapidly.

    • kevin

      First, it's been 4 years since iPhones were announced. And it's only been 2.5 years since the App Store opened.

      Second, it really is pitifully low when compared to the revenues of the auto makers over the last 2.5 years. But I'm absolutely certain that it's significantly higher than any digital app store ever on this earth. And that it's way more than anyone projected in July of 2008.

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