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iTunes Update

In the latest quarter the iTunes group top line grew by 25%.

Additional newly reported items:

  • Quarterly revenues dipped slightly to $4 billion (second highest after $4.1 billion last quarter).
  • iTunes Stores billings (i.e. gross content revenues) were $4.3 billion
  • Reached the best month and best week ever for App Store billings at the end of the quarter.
  • iTunes billings translated to quarterly revenue of $2.4 billion, up 29% from the year ago but flat q/q. Company reports “strong growth in revenue in both content and apps.”
  • New content added includes HBO GO and WatchESPN available on Apple TV. Apple TV catalog now includes over 60,000 movies and over 230,000 TV episodes.
  • Users have downloaded more than 1 billion TV episodes and 390 million movies from iTunes to-date. They are purchasing over 800,000 TV episodes and over 350,000 movies per day.
  • iOS developers have now created more than 900,000 iOS apps including 375,000 apps made for iPad. Apps created grew by 50,000 overall and 25,000 iPad apps.
  • Cumulative app downloads have surpassed 50 billion.
  • App developers are being paid at the rate of $1 billion per quarter.
  • App developers have been paid over $11 billion for their sales through the App Store (half of which was earned in the last four quarters.)
  • There are now over 320 million iCloud accounts
  • There are 240 million Game Center accounts
  • Almost 900 billion iMessages have been sent
  • Over a 125 billion photos have been uploaded and over 8 trillion notifications were sent.

Some observations and estimates:

  • Music revenue growth remains at around 15% while video revenue growth remains around 25%
  • Apps continue to accelerate with a near doubling of revenues
  • Book revenues are contracting as pricing pressure is being felt
  • The software group grew moderately at 15% as Apple’s apps are reaching saturation within the iOS user base and as Mac sales stagnate.

As a reminder, you can order the iTunes Business Review from the Asymco Store.

 

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  • Rogers

    Two questions ….

    - app creation seems to be down, thought I’d heard 1,000 per day (~550 per day above); is it slowing? why?
    - developers paid at $1B per quarter, 50% of $11B total paid in past 4 quarters; does this mean that the December (perhaps Mar) quarter was 3X last quarter?

    • Dennis Baker

      App creation is “down” due to the focus on producing applications for iOS 7. There is a lot of evidence that developers are focusing a lot of effort to produce apps for the new version and want it ready when it launches or shortly after. Since you can’t submit apps to the app store for iOS 7 yet, things are queueing up.

      This will also result in a significant increase in app sales as people switch to new apps that leverage the capabilities of iOS 7.

  • Jerry

    900,000 iOS apps is nothing. Android has more apps than that just in its porn store. And that not even counting child porn.

  • jpintobks

    Interesting number about books. With 51 iTunes stores around the world supporting different languages, including Spanish. Sales of my publishing company in iBooks double in 6 months and Kindle sales are flat.

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  • Chaka10

    Any new insight into profitability in light of the continued growth?

    • Sacto_Joe

      I think that GM is useful to know, but for the very reason you state, as an investor I am less interested in it than in seeing development of a growing ecosystem that ensures long-term earnings stability. The walled garden, IMHO, should be embraced as a concept and as a term, because that is exactly what Apple is offering its users that keeps those who have entered from leaving – by their own choice.

      Also, at this stage, I am looking at annual numbers. And by that I don’t mean yoy quarterly comparisons. One of the reasons I love this chart is that it gives me a multi-year glimps at Apple’s ecosystem growth.

      • Tatil_S

        I think his point is questioning the assumption of low margin for iTunes and App stores. If the margins are really low for that side of the business, the hardware side would have to be that much more profitable to get to the same overall GM.

      • Sacto_Joe

        I got that. But for investing purposes a focus on GM is, IMHO, a red herring.

      • Chaka10

        Respectfully Joe, that’s not right. Declining GMs is why Apple’s earnings declined YOY significantly from $8.8 bb to $6.9 bb in the June quarter, even though revenues increased slightly from $35.0 bb to $35.3 bb.

      • Tatil_S

        Well, he might be right for investing *in this market*. If the revenue numbers shut up, rather than flat, I think the stock market would cheer even with falling total profits. (See Amazon) :-)

      • Sacto_Joe

        At home now, on the big computer, where Disqus works halfway decently.

        I totally agree that the market for Apple shares is obsessed with Apple’s earnings. And I hope you agree that it makes little actual sense. Apple’s earnings are the envy of its competitors, by a huge margin, even after they’ve declined. Meanwhile, other companies are given a complete break on the issue of earnings.

        It’s frankly a sign of the market’s failure (to understand what Apple is up to) that they obsess over Apple’s earnings. THAT’S my point. And the reason I particularly like Horace’s focus on iTunes growth is that it shows graphically that Apple is succeeding wildly in the one area the market SHOULD be valuing and doesn’t.

      • Sacto_Joe

        Just reread my comment, and realized that it could be interpreted that I was saying you were creating a “red herring”. Not what was intended. The “red herring” I was referring to is the market’s obsession with the “red herring” of Apple’s earnings growth. You were very clear and not by any stretch creating a red herring.

      • Chaka10

        “I think his point is questioning the assumption of low margin for [the iTunes product segment]” Yes indeed. As my illustrative math shows, if that business had low GM, the growth of that business would contribute to lower company-wide GM. But in fact, even as Apple has moved to highlight the growth of that business (in the reorg of its product segment presentation as well as in earnings calls), there is no mention of that business being a factor in lower GMs. See excerpt below from the latest 10Q. What I don’t know, however, and would live to see some smart analyst figure out, is actual estimated GMs for that business.

        From the latest 10Q: “The year-over-year decrease in gross margin during the third quarter and first nine months of 2013 was driven by multiple factors including introduction of new versions of existing products with higher cost structures and flat or reduced pricing, introduction of iPad mini with gross margin significantly below the Company’s average product margins, higher expenses associated with changes to certain of the Company’s service policies and other warranty costs, and price reductions on certain products, including iPad 2 and iPhone 4.

      • Chaka10

        Somehow Disqus put up my post under “Guest” so I’m reposting here.

        “I think his point is questioning the assumption of low margin for [the iTunes product segment]” Yes indeed. As my illustrative math shows, if that business had low GM, the growth of that business would contribute to lower company-wide GM. But in fact, even as Apple has moved to highlight the growth of that business (in the reorg of its product segment presentation as well as in earnings calls), there is no mention of that business being a factor in lower GMs. See excerpt below from the latest 10Q. What I don’t know, however, and would love to see some smart analyst figure out, is actual estimated GMs for that business.

        From the latest 10Q: “The year-over-year decrease in gross margin during the third quarter and first nine months of 2013 was driven by multiple factors including introduction of new versions of existing products with higher cost structures and flat or reduced pricing, introduction of iPad mini with gross margin significantly below the Company’s average product margins, higher expenses associated with changes to certain of the Company’s service policies and other warranty costs, and price reductions on certain products, including iPad 2 and iPhone 4.”

      • Sacto_Joe

        Tried to leave a response on your last message but basically Discus sucks on an iPhone.
        Just because the market is obsessed with Apple’s GM/margins doesn’t mean they “get it”. And in the long run it’s all about getting it.

  • highr0llerr

    I think Chaka10 has raised a very important point.
    I’d like to go back to one of the earlier posts by Horace (So long, break even) where he suggested that his estimated operating margin for the App Store is 2%. I’ve done some analysis on my own and here’s what I’ve come up with.
    First, we know the revenues very well, with the latest figure being 11 billion dollars paid to developers in total, half of which has been paid in the last 4 quarters, which means that the developers get paid over $1bln every quarter. Hence, we can easily derive the amount of money that Apple keeps to itself and that is over 430 million dollars quarterly.

    So, what are the major expenses that Apple incurs in running the App Store? There are hosting and bandwidth costs, payment processing costs, and finally, there are expenses associated with approving and administering the apps. So let’s analyze what some of those costs might be.

    1. Hosting and bandwidth costs. What we know is the number of apps in the App Store and that is over 900,000 apps. We also roughly know the average size of an app, which is over 20MB, which means that the size of the App Store is around 20TB- hardly a huge amount of data these days. Of course, Apple hosts the apps on multiple servers in different locations, but nonetheless, it’s rather meaningless. Then there are bandwidth costs. Again, we know the number of quarterly downloads, which is currently sitting at over 6bln apps, so the amount of data transferred each quarter for app downloads is 126 petabytes. Of course, the overall number is significantly greater, taking into account updates and other types of communication with Apple servers done by apps. Still, I doubt that Apple incurs significant expenses. Let’s use Netflix to help us estimate Apple’s expenses. From Netflix’s 10-Q we know that the number of Netflix users is 29mln. According to a study, Netflix subscribers, on average, watch 5 TV shows and 3 movies per week. http://www.businesswire.com/news/home/20120906006400/en/Average-Netflix-User-Watches-5-TV-Shows
    Given these numbers, it’s easy to estimate the amount of data transferred every quarter. Assuming the average size of a TV show at 0.75GB and of average movie at 3GB, we have 166GB of data per user per quarter. Multiplying by 29mln gives us 4814 petabytes, which I think is quite a bit more than the amount of data Apple has to deal with when it comes to apps. So, how much does Netflix spend on technology and development? 92mln dollars per quarter, according to one of their latest 10-Qs. So, I think it’s safe to assume that Apple doesn’t spend more than that on hosting and bandwidth, operating the App Store.

    2. Payment processing costs. This one is a little bit harder to estimate. We know that Apple pays a certain amount for every purchase transaction that takes place. How much exactly- is a mystery. I’ve seen estimates that vary a lot and are as high as 25 cents for every transaction. Since a lot of apps and in-app purchases are priced at 99 cents, even though Apple employs certain techniques trying to bring these expenses down, like bundling purchases taking place over several days together, these costs can indeed eat into Apple’s margins quite a bit. However, let’s look at it from a different angle. We know that the two biggest credit card companies generate just over 5 bln dollars in revenue every quarter. Given that number, I think it’s inconceivable that Apple spends the bulk of its 30% cut on payment processing. Apple’s App Store is a tiny fraction of global e-commerce, with sales over 1 trillion dollars annually, whereas e-commerce itself isn’t even 10% of global retail. Just ask yourself, how many of all your monthly credit card transactions are Apple’s App Store transactions? Even if we assume that Apple pays 50 mln dollars in payment processing fees every quarter, that would still amount to 1% of combined MasterCard’s and Visa’s revenues- a huge number, when put into perspective.

    3. The third major expense item could be the biggest one for Apple. This is what Apple spends on app approval and administration. What we know is that currently there are under 1000 apps being submitted to the App Store every day, and that on average it takes a few days for an app to get approved. So how many people does Apple employ to get this job done? I would assume that the app aproval process is largely automated. Things like undocumented APIs can be found relatively easily. Other things will take longer. Still, if it takes an employee 2-3 days to approve an app, the number of employees involved shouldn’t be significantly greater than 2000. Given the quarterly cost per employee of 40000 dollars, we have 80 mln dollars in expenses.

    Adding up all of the expenses listed above, there should be quite a bit left over for Apple, given its half a billion cut. I’m having a hard time arriving at 2% operating margin. Besides, given the economies of scale, the operating margins will only get better. If the music business was running at “a little over break even” in 2006, as was stated by Apple, it should have even better margins now. Same goes for the App Store, considering how much is has grown over the past few years.

    Does anyone else have any insights on this?

    • Tatil_S

      I am fairly certain I don’t download 3GB while watching a typical Netflix movie. My DSL line’s full limit is below that and we can usually do some browsing on the side while the movie is playing. I doubt I am such an atypical Netflix viewer.

      Visa and MC only get a cut off the transaction fees, the rest is shared by the issuing and merchant banks, so Visa and MC revenue does not tell you the whole story.

      • highr0llerr

        Maybe I overestimated the size of an average movie a little bit, as 3-4GB is closer to the size of a HD movie. A SD movie is about 700MB. http://nerdr.com/tag/netflix-bandwidth-usage/

        I would think that most new movies watched nowadays are HD. However, even if we assume 1 GB per movie, that doesn’t change the overall picture a whole lot.

        Regarding the credit card transaction fees- you’re right. However, my point is that even if Apple pays 250 mln per quarter and the credit card companies take a 20% cut, it’s still hard to imagine the App Store being responsible for 1% of the global shopping activity done with credit cards.

      • Tatil_S

        Those numbers start adding up though. If the first downloads take up 126 petabytes per quarter as you said, we still need to know how much per quarter do people spend on app updates. I might buy or try 10 apps a quarter, but I am pretty sure I update the existing ones for about 100 times, some apps once a quarter, some apps multiple times. Reduce Netflix’s bandwidth by 66% and increase Apple’s by 10x. If you assume higher bandwidth costs as Apple needs to serve the globe while Netflix can concentrate on limited geography, you can spend a quarter of that $430 million just on bandwidth by scaling it based on Netflix.

      • highr0llerr

        I still don’t see how App Store’s data traffic can be higher than Netflix’s. Even adjusted for non-HD movies and tv shows, it would be significantly higher than Apple’s. As for the app updates, what we need to establish is how many updates an average user does during a quarter, as opposed to downloads. I doubt that the ratio is 10. From my experience, it’s around 5-6. Besides, Netflix’s technology and development expenses include more than just hosting and bandwidth. Again, I don’t think Apple spends more than Netflix on hosting.

        Another way of looking at it, is comparing the App Store to Google Play. We know that Apple gets quite a bit more revenue from its store than Google, though the size of the stores is fairly close and some say that Google has already surpassed Apple in app downloads. If this is the case, and Apple just about breaks even on it, than Google must be deep in the red, assuming that it costs the two companies about the same to maintain the stores.

      • Tatil_S

        If Apple’s gross iTunes revenue is $430 million and barely profitable, Google Play could indeed be losing a couple hundred million dollars, but that is an amount is easy to mask in the income statement buried in mobile ad income. On the other hand, I agree that iTunes is probably more profitable than “barely”, but i don’t think it is a great business on its own either.

      • highr0llerr

        Could be, though for a company that makes about 3 bln in profit per quarter, a couple of hundred million is no small change to lose. It would be comparable to Motorola’s losses.

      • Tatil_S

        Well, it wouldn’t that comparable. Google did not spend $12 billion to acquire Play store. :)

    • Sacto_Joe

      There are also the costs of continuing buildout and continuing product improvement.

    • anon_coward

      you’re missing stuff
      apple also sells music and movies along with apps. even then they don’t keep it all on a consumer lever hard drive. they have lots of SAN’s or commodity servers with something like 5 times the raw storage to usable storage ratios. there are also redundant servers standing by in case the primary ones fail.

      add network and lots of other hardware like firewalls and security appliances. all the precious metal support contracts for 1 or 4 hour fix times.

      for payment you have to add in all the software apple has to buy, maintain, develop, etc to process the payments as well as auditing costs and the humans required to satisfy the audits. Steve Jobs mentioned SAP in an interview years ago.

      • highr0llerr

        I chose to focus only on the App Store in my comment. I think it’s the most interesting component of iTunes, the fastest growing and the most promising of them all. Of course there are other costs associated with running a business like that. I quoted 92 mln that Netflix spends on technology and development for a reason. They too have a lot of other costs. That’s what their 10Q says about T&D:

        “Technology and development expenses consist of payroll and related costs incurred in making improvements to our service offerings, including testing, maintaining and modifying our user interface, our recommendation, merchandising and content delivery technology, as well as our telecommunications systems and infrastructures. Technology and development expenses also include costs associated with computer hardware and software.”

        As we see, these expenses include all of the infrastructure costs and much more.

        As for the payment processing- I think any fixed costs related to payment processing will pale in comparison to the processing fees that Apple pays. Let’s say they pay $0.1 for every $0.99 transaction, which means the processing fee is 33% of their cut. I don’t think that any fixed costs will come close to that. This is where you get economies of scale, as the fixed costs don’t scale up as much.

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  • Arne

    Hi, I’m wondering about the chart. Total revenues for the last quarter amount nearly $5bn. Do the figures refer to gross revenues? I could read above there were $4.3bn iTunes Stores billings. Does this number exclude software or services (or even both)?

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

      5 billion includes all content billed (included some which is not recorded as revenue) plus software and services.

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  • Govindraj Jahagirdar

    Pl mail me my dues .i will pay