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The iTunes Value Structure

The International Federation of the Phonographic Industry (IFPI) reported that global digital revenues were $5.6 billion in 2012. This represented about 9% growth from 2011 and accounted for 34% of total industry revenues[1].

Apple regularly reports iTunes as a separate revenue item and occasionally it also reports payments data for developers and app download rates. By interpolating the data published and combining it with some assumptions it’s possible to estimate the mix of revenues (and costs) associated with iTunes.

My yearly estimates are summarized below.

Screen Shot 2013-02-26 at 2-26-6.04.23 PM

Note that I also included historic digital music industry revenues (as a line). I also included the following summary items:

  1. iTunes reported revenues were $13.5 billion (including Apple’s own software sales)
  2. iTunes gross revenues were about $15.6 billion (including payments to developers)
  3. The iOS and OSX “App Economy” was about $7.5 billion while the iTunes “Media Economy” was about $8.1 billion (both figures include transaction costs.)
  4. The iTunes Music economy was $4.3 billion of which $3.4b was paid to music labels.[2]

In terms of percent of total value the components are:

Screen Shot 2013-02-26 at 2-26-6.09.12 PM

Looking at growth, these estimates imply that App revenues are growing at about 50% while iTunes Music is at 10% and Video+other at 90%.

Looking at profitability, there is potential for operating margin in Apple Software and App Agency Fees and perhaps some of the Media Transaction Fees (exploded wedges above). Historically, Apple suggested that their App and Media stores ran at break-even but that may no longer be the case. Operating margins from Software may be significant.

Notes:

  1. These revenues were from recorded music and don’t include live performance
  2. My estimate for the iTunes Music payments to publishers is equivalent to about 60% of total industry revenues.

Comments

19 Comments so far. Leave a comment below.
  1. Walt French,

    @Horace wrote, “these estimates imply that App revenues are growing at about 50% while iTunes Music is at 10% and Video+other at 90%.”

    Must be from a relatively tiny base for Apple not to be transitioning AppleTV from “hobby” status. I presume that Apple has its eye pretty focused on that category, deciding when the business has enough potential to justify a major roll-out that will necessarily attract competitors’ products. If it does it too soon, any early mover advantage will be squandered on low-revenue years.

    Or perhaps the obstacle is that they can’t buy the “iTV” naming and they’re re-thinking their whole identity.

    • I had to make assumptions about the percent of total digital that iTunes represents. The main assumption is that the ratio has not changed much since 2008 when it had to have been about 50% (because there was no Apps and no other media). I grew it to 60% and doing so leads to the 10% y/y growth that IFPI also reported. From that and the knowledge of overall revenues and the app economy we can get the “other media” total. Just how big the video business has become for Apple is coming tantalizingly close to observable.

    • KirkBurgess,

      Apple is slowly but steadily rolling out video content worldwide (usually movies, but sometimes streaming TV content also), and the Apple TV set top box is being rolled out at the same time.

      This is the same way iTunes music store rolled out.

      The iTunes movie store is most definitely the largest on demand movie store globally (other US players are virtually non-existent internationally).

      Once you start buying movies on iTunes, or download a digital copy that accompanies a blu ray/DVD via iTunes, then you are highly likely to remain locked into the ecosystem.

  2. Gaussian Blur,

    Thanks for another great analysis… QA note… color labels are inconsistent between the graph and the pie. I believe Apple Software and Developer Payments are inverted so you’ll want to relabel and re-explode the wedges.

    Will be interesting to revisit the pie should the rumored Pandora-like service come to pass.

  3. MOD,

    “For third-party applications sold through the App Store and Mac App Store and certain digital content
    sold through the iTunes Store, the Company does not determine the selling price of the products and is not the
    primary obligor to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in
    net sales only the commission it retains from each sale. The portion of the gross amount billed to customers that
    is remitted by the Company to third-party app developers and certain digital content owners is not reflected in the
    Company’s Consolidated Statements of Operations.”

    Hi Horace,

    Why are you treating app developers differently from music, video and book publishers?

    According to the Financial Statement wording “certain digital content owners” could very well include music, books, videos…

    This could mean Apple iTunes reports net revenue, not gross, for all of these categories.

    • Certain digital content is mostly books. The question of whether Apple can allow books to be priced using the agency model is now before the courts. The US government argues that to do so is a breach of anti-trust law. All the other media types are handled using a “wholesale” model (not agency.) Read more here: http://www.macstories.net/stories/understanding-the-agency-model-and-the-dojs-allegations-against-apple-and-those-publishers/

    • I would add that Apple has argued that it does not see a difference between apps and other forms of media. This implies that the app model (i.e. agency) is what they prefer. This implies the publisher sets the price and Apple is only taking 30%. Note that this is not the case for music or other media. The price for a song is variable only between country where sold and two brackets (i.e. $0.99 and $1.29). The same is true for movies and TV shows. It may not be true for subscription services like Hulu or MLB channel on Apple TV but these are likely to be immaterial.

      • MOD,

        Are you saying that if the price is fixed it is decisive evidence that the model is “wholesale”? Could it not be “agency” and the media cos. decide to all sell songs at the same price? Or would the DOJ jump on it if they smelled “agency”. I would prefer a statement and breakdown from Apple.

        We are talking about reporting $1.00 of revenue versus $0.30 of revenue. Is 8 billion 100% or just 30%?

      • Price is not the only indicator. The question is for what digital content is Apple not the “primary obligor to the customer.” My opinion is that for Music and Videos Apple is the primary obligor. It stands to reason that if a piece of music does not play or is lost, Apple is obliged to deliver a working copy. But in the case of an App, if it does not function, it’s the developer’s responsibility (Apple’s curation of the store notwithstanding) to put it right. Apple also consciously negotiates a set price for music and videos (including movies) because it wants to set expectations of a predictable market.

  4. Hi Horace,

    In your analysis, are you using “Music Publisher Payments” as a term to generally refer to all payments made from Apple (iTunes) to the music industry (i.e. labels, artists, songwriters, etc?)

    If so, I would recommend using a term other than “Publisher,” as that means something specific to the music industry. A “music publisher” is not synonymous with “music label.” If the money is getting paid to labels, you could say “Music Label Payments.”

    Thanks for the great detailed analysis as always.

  5. Bruce_Mc,

    1990’s criticism of Apple: They need to concentrate more on market share, less on innovation.
    2010’s criticism of Apple: OK, they have market share, but they need to concentrate more on innovation.

    What happened between the two decades was the decade of the iPod and iTunes. I am just starting to appreciate how much Apple learned and changed from their experience with iPod and iTunes. Your post helps make that clear to me.

  6. Chaka10,

    Horace, I think your analysis is based on calendar, not fiscal, years, correct? I initially got a bit confused trying to tie the numbers to AAPL reports, but think I got it — grateful if you would pls confirm (based on AAPL’s reported revenue numbers for iTunes, etc. I think the simple math is: $12.9 bb for FY12 minus $3.0 bb for 1Q12 plus $3.7 bb = $13.5 bb for calendar 2012).

    Do I observe correctly that by your estimates AAPL essentially has 30% “gross margins” on its resale of third party Apps and content (gross margins in brackets bc the agency business does not recognize gross revs)? And the fastest growing part of the media sales business — books and videos — has higher GMs than the music business?

    • Yes, all years published on this site, unless otherwise declared, are calendar years.

      My assumption is that about 30% of all media revenues are retained to pay for transaction fees, hosting and delivery as well as other operating expenses. I’m not sure this is quite “gross margin” but it’s the cost that is not directly paid out to the content owners.

      • Chaka10,

        I use gross margin loosely, under quotes. AAPL reportedly had referred to its 30% agency commission for eBooks in terms of “margin” — perhaps that’s a useful way to think about it (revenues net of “cogs”, before operating expense)….

      • Chaka10,

        Horace, a separate question, if I may …: how big a is the iBooks part of “Videos and Books”, would you estimate, and how much of a threat to that is the DOJ action? Thanks in advance.

      • The DOJ action is related to the pricing model and the deal structure between Apple and the publishers. If Apple loses it will need to change its pricing to probably reflect that of Amazon. It’s not clear to me if that would change the value Apple captures from iBooks. iBooks downloads are about 550k/day while songs are around 25 million/day and Apps above 50 million/day.

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