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iTunes Segment Revenues in Context

In the last few posts I estimated the iTunes economy in some detail. In absolute figures, the revenues and cost structures of iTunes are substantial:

  • 6.3 billion transactions in the last quarter
  • $4.6 billion consolidated revenues (including software & services)
  • $3.3 billion in content payments
  • $650 million in operating income

However, as a part of the entire Apple revenue model, iTunes appears to be a small contributor. The following diagrams shows where revenues came from and where they were spent during the last quarter

Sankey-Income1

A few notes:

  1. Click on image to enlarge. The graph was produced using an iPad and it is rendered at iPad retina resolution.
  2. The data covers only the Fourth Calendar Quarter of 2012.
  3. For scale reference, “Dev Payments” equals $1 billion (as marked.)
  4. When zoomed in, each pixel represents about $50 million (vertical dimension).
  5. Revenues shown are “gross” and therefore greater than reported. See post on iTunes Revenue Recognition. �The same reason affects the total Cost of Sales (COS).
  6. Sources of revenue are ranked according to size. Note that Music is higher than iPod or Peripherals and Apps are higher than Software.
  7. Different Cost of Sales components are also ranked by value.
  8. iTunes which is the sum of Music, App, Software, Video and books makes up about 7% of overall revenues but 10% of costs of sales and hence contribute about 4% (est.) of total operating margin.

A three year view of the same data is shown below:

Screen Shot 2013-03-26 at 3-26-2.07.06 PM

  • kgbraund

    very perceptive and lucid

  • obarthelemy

    The way I see it, right now iTunes is more of a “cost of doing business” type of thing, required for Apple to be able to sell their hardware (and they keep repeating they are a hardware company). Pretty much like the iOS and MacOS, iTunes is required (but not sufficient). Actually, iTunes is the ecosystem’s OS.

    Funny thing is, looking forward, OSes have a way to turn into rents (via lock-in) and jumping boards (via upstream expansion into software, content/ads, services…). It takes a while, but you get… Microsoft. Apple’s strategy might turn out the same, moving from OS to Apps, and then to Content/ads (I guess Content/ads substitutes for Services in the Consumer segment ?). Long-term prospects are nice, especially since Apple have established a level of control on their ecosystem that MS never had on theirs.

    • Walt French

      @obarthelemy wrote, “iTunes is more of a ‘cost of doing business’ type of thing…”

      Sure wish *I* had negative expenses in my work.

      Historically, the iTunes Music Store was a lynchpin that transformed the industry from portable music players with a bunch of crap-quality, indiscriminate, availability-driven ripped-off MP3s, into a burgeoning, legit way of consumers getting the specific music they loved, easily and blah blah. Apple reaped the reward for bringing the music industry into the 21st century.

      Pretty obvious that Google didn’t want Apple to sew up the app industry that same way. It seems that the TV and movie industries don’t have the piracy problem that drove the music labels into Apple’s hands, so the transformation is going slower there.

      Whatever, a “cost of doing business” is the flip side of a potentially huge profit and usage base for anybody who can “crack” the problem.

    • Chaka10

      “OSes have a way to turn into rents (via lock-in) and jumping boards (via upstream expansion into software, content/ads, services…). It takes a while, but you get… Microsoft.”

      I gather MSFT realized its Windows rents by charging for the OS itself. Apple obviously doesn’t charge for its OS (except as imbedded in its device price), but it does charge for the sale of 3rd party developer apps and in-app sales. I don’t think MSFT had access to anything like that. I gather Apple wouldn’t see it as a rent (and I can see arguments why it shouldn’t be seen as rent), but in any case it remains to be seen how profitable that can be. Anecdotally, I observe that the younger generation seems to face little psychological hurdle with making in-app purchases of intangible digital goods (much less so than parents), and I think those sales are virtually 100% margin for the seller and Apple.

    • http://www.noisetech-software.com/Home.html Steven Noyes

      I like the anolgy of iTunes being Apple’s OS for their eco-system. It is actually a good insight. The OS is far from traditional in that it is distributed, multi-platform and takes different shapes, but in many ways the concept fits.

      One aspect though:
      “and they keep repeating they are a hardware company”

      Has not been true for many years. As I have said many times, Apple is a systems company where they make their money by selling hardware. Tim Cook also agrees:
      http://techcrunch.com/2013/02/12/tim-cook-talks-up-apple-software-and-services-we-are-not-a-hardware-company/

      From the Techcrunch:
      “Because we’re not a hardware company,” Cook said, “there are other things we are doing and could do to have revenue and have profit flow.”

      I think Apple realized years ago they were no longer a hardware company like they were when they did the Apple II and original Macs. Starting with the iPod, they became a systems based company that extends the value of their hardware by offering unique and compelling services and capabilities. Some of these are traditional services (like email, cloud backup…) and some are through custom protocols (Like Remote App, AirPlay…).

      • Davel

        In order to fulfill this vision Apple needs to step up its game.

        There needs to be tighter integration of services like Siri, passport, iCloud in their system. These products NEED to get better. Apple TV needs to be opened. For example why is there no pandora on Apple TV?

        Even Samsung is starting to get into software.

    • Davel

      I understand what you are saying about iTunes and OS however this is not really true.

      iTunes is the store. It displays the product and allows you to purchase it, but it is not the platform that allows you to use it.

      For example once you buy an app it exists on you device. You run it outside of iTunes. Pandora and Netflix allows you to consume media without iTunes once the app is on your device.

      • obarthelemy

        iTunes is more than the store, it’s also the infrastructure that lets you buy and install apps, buy and synch media (bought content), save and sync documents (user-created), update your devices’ OS, authenticate users, implement DRM…

  • Nigel

    What iPad software did you use to create the Sankey diagram?

    • http://twitter.com/asymco Horace Dediu

      Perspective from Pixxa. The Sankey feature is not yet released.

  • Herve

    Great post. Thanks. I have an absolutely unrelated question: Which software did you use to make the graphs ?

    • http://twitter.com/asymco Horace Dediu

      Perspective from Pixxa. The Sankey feature is not yet released

      • herve

        Thanks Horace

  • gprovida

    Apple is such a unique company. If I looked at the revenue and emerging earnings from iTunes over time it would rather modest compared to spectacular growth of Apple’s other sources, but for most companies the revenue and now profit growth would be very satisfactory. Therefore, the value associated with iTunes is diminished due to the other Apple revenue sources, but for non-Apple it would be a WoW!! in fact, the growth opportunity in categories like software [apps] video, publishing, education, as well as music would be exciting, especially when coupled with Apple’s international presence and growth.

    • nizy

      Agreed. Compare iTunes to Amazon for example and you find that for the last quarter Amazon generated more Revenue ($21b vs $6b) but generated far less profit ($97m vs $650m).

      • DaveChapin77

        If you add Apple’s Online Store and Retail stores, where does Apple stand revenue-wise with AMZN?

      • http://twitter.com/asymco Horace Dediu

        While we don’t have data on Apple’s Online store revenues, Apple Retail was $6.44 billion in revenues.

  • chad

    As you have astutely identified, the relationship between devices and iTunes is symbiotic. Certainly it is possible to imagine both existing independently, but in combination they provide a multiplier effect for each other. Devices are more valuable with content, content is more valuable with devices to access it. I wonder what would be the value of this multiplier effect? My hypothesis is that it would not be equal in both directions, that iTunes provides more of a boost to devices than vice versa, but perhaps that is not the case.

    • Mark Jones

      Note, though, that Apple was able to set and hold its iTunes “fee” at 30% (and push through other privacy/transaction rules) because the 3rd-party content owners recognized that their content would be made easily available to huge numbers of fairly affluent users (devices). Many magazines and software companies who initially balked have since chosen to sell through the iTunes Store.

      Note also that initially Apple software and iTunes was partly a defensive move by Jobs against Microsoft and Adobe – to ensure that Apple would not be held hostage for software and media content like they were in the 1990s. iTunes helped establish Quicktime as a defacto industry/user standard (against wma/wmv and flash) and get rid of the Macs-are-incompatible stigma, and Safari/iLife/iWork/Pro apps helped to get rid of the Mac-has-no-software stigma. Apple has since turned iTunes into an offensive element for its iOS ecosystem.

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  • fstein

    Thanks so much. This detail really helps. Combined with your earlier views on the growth of the aftermarket content/apps sales, we see a growth area that no one else talks about. Plus this profit stream compensates for impact of product cycles and the possibility of margin compression.

  • Schwayze

    Where did you find the gross margin percentages for each product?

    • http://twitter.com/asymco Horace Dediu

      They are part of what I produce.

  • Brrriiiaaallliiiaaannnttt

    Very nice! The next iteration should include the ability to drill-down / drill up.

    E.g. By clicking on ‘iPhone Cost of Sales’ –> You would drill-down to the next level of granularity (e.g. Cost of each component / Cost to assemble / Etc.)

    There are a couple applications on the Mac that let you do this with the data / files on your Mac, and not only ‘blow your mind’, but provide an interface that gives you insights that you would never be able to get otherwise…(The Mac apps are called ‘Daisy Disk’ & ‘Grand Perspective’)

    Anyway, kudos for putting together…

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