How big is Apple’s Ecosystem?

iTunes/Software/Services revenues grew at 12%. This was the second fastest segment growth last quarter, with the Mac growing at a slightly faster 13% rate. Apple mentioned in the quarterly earnings conference call the for the first nine months of its fiscal year (i.e. since September) the line item iTunes/Software/Services has been the fastest growing part of the business. The following graph shows the growth scorecard for Apple’s line items and it shows how the iTunes store is the only line that has been consistently green (growing above 10% for at least seven years.

Screen Shot 2014-07-29 at 8.58.53 PM

In addition to its revenues, iTunes can also be measured in terms of billings (or gross revenues). The billings growth rate is even higher at more than 25%. This is mostly to the more rapid growth of apps relative to a decline in music. As Apple only records the 30% it keeps as “revenue” for apps the overall growth in apps is less visible in its accounts.

The relative performance of billings vs. reported revenues is shown in the following graphs:

Screen Shot 2014-07-29 at 9.02.13 PM

Note the estimated split between media types and software and services. The software and services portion of the business had sales of $1.9 billion while the revenues from third party content/apps sales reached $2.6 billion.

The value of this data is that it encompasses an almost complete view of the Apple ecosystem. As almost all content and transactions are tracked and reported and one can get a very precise view of the economic value of the ecosystem.[1][2][3]

From the launch of the iPhone the value of Apple’s ecosystem has grown more than 600% which is faster than overall sales growth (approximately 400%). If ecosystem value grows more rapidly than underlying hardware sales the question that emerges is when would the ecosystem transaction value exceed that of the business is supposedly supports.

Today the iTunes/S/S ecosystem is about $20 billion/yr. iPod, iPhone, iPad and Mac sales are about $150 billion/yr. It does not seem likely that the former will overtake the latter. If that were the case then one wonders why build a business entirely predicated on retailing and services without the support of hardware revenues. Something along the lines of Amazon.

  1. In addition to iTunes/Software/Services Accessories could also be considered as part of the ecosystem. The value of Accessories and licensing as Apple reports it adds another $6 billion to iTunes/S/S []
  2. What is missing are ad revenues through apps which don’t use iAd []
  3. What is also worth asking is what is the size of alternate ecosystems such as those of Microsoft, Google etc. []
  • stefnagel

    Why? To see how far you can fool Wally Street? Indefinitely.

  • peto1

    I think a worthy goal for Apple, worth them stating explicitly as such, would be to grow the iTunes/S/S ecosystem to a point where it equals the hardware business at least in terms of its contribution to the bottom line …

    • charly

      Difficult to realize in a positive way as the profit Apple makes on hardware per user per year is high and what people spend in total on software and content (music,video,books etc) is that high.

      ps. Negative way is easy as in don’t make so much profit on hardware.

  • Walt French

    This is a good extension to the study of the ecosystem, which is now dominated by apps.

    But we keep seeing complaints by famed developers, including a tweet in the last day or two, saying the app store would be “better off” without any of the “Top X” lists, because they guide users to only consider apps that are already top sellers; it’s a self-fulfilling clustering mechanism that bifurcates the apps into winners and losers.

    To my eyes, it seems more that the app ecosystem has grown beyond the artisanal craft of the Mac developers who are the grand-daddies and thought leaders; good or even beautiful work, publicized by word-of-mouth and old-boy networks are no longer good enough. Old-timers are unsurprisingly unhappy. But newcomers may not have realized that, despite those billions paid to devs, the odds of making money as an iOS developer are long.

    Since Asymco is one of the few analyst sites that understands “the job to be done,” perhaps it could also be one to look into how customers find useful apps for the constantly-changing smartphone uses.

    • obarthelemy

      On the Android side, the situation has gotten ridiculous. Android Police (I think ?) do a “best 25 games of last week” column, which I guess is better than “last week’s 2,000 new games”, but still fairly useless.

      I read last week something about a large majority of apps being zombies that bring no revenue nor downloads.

      What surprises me most is that no ecosystem warden has taken the opposite tack, of porting apps themselves, and only those they deem worthy. That would be a whole new level of curation and security.

  • charly

    Isn’t this the Xiaomi plan.

    • handleym

      You mean Xiaomi plan to branch out from what they do today (which is, as far as I know, ONLY hardware — not even web services) to start their own content store?

      • obarthelemy


        Now, Google are not present in China. International expansion might piggyback on Google’s PlayStore which would be popular and make the move easier.

      • handleym

        I’m not sure what your point is. The article references the Xiaomi app store, which is not in doubt. It does not reference other Xiaomi web services.
        Xiaomi does not, as far as I know, run their own maps, their own search engine, their own chat, their own social network, their own cloud store. If they have plans to follow Apple’s lead in tying together a variety of different devices working seamlessly, they don’t seem to have the iCloud equivalent in place to do this.

  • Ian Ollmann

    What is going on with music? Is this flight to internet radio services?

    • charly

      Partly but the ipod had a much higher market share with people that bought music than the iphone has.

    • I suspect purchases have reached saturation with those who are inclined to purchase (i.e. of a certain age.) Younger people have never purchased and probably never will. The result is a wholesale transition to streaming and away from ownership. Music itself therefore becomes something you borrow or rent to solve the niche jobs it solves. This transition from ownership is, in my opinion, what prompted the acquisition of Beats and the subsequent repositioning of iTunes as a discovery engine.

      • handleym

        Streaming seems to have interesting business implications in an economically stratified society.

        When you sell music, you can do a better job of what is essentially variable pricing. You expect the rich to buy more CDs/iTunes tracks, you expect the poor to buy second hand CDs, you expect the more poor to copy tapes (but who cares, because they have no money to buy CDs anyway?) This allows you to set fairly high CD prices that still allow for wide distribution of music.

        The iTune store already flattens this (no second hand sales) and streaming flattens it even more (no real difference between the guy willing to pay $1000 a year and they guy who buys one CD a year. You can maybe create three tiers of price (free with ads, pay for no ads, pay more and get more/full control over what you listen to) but you can’t really exploit the people who were mass buyers. [To be clear, people who were mass buyers will probably continue that way for a while, but you’re not creating any more of them in the new generation.]

        The dream, I expect, is to be able to do what CableTV does and just keep ratcheting up the price every year. But CableTV has managed to evolve into the rapacious beast that it is through a series of historical contingencies — music is consumed differently, and does not have the content lockups that allow Cable TV to operate that way. Very few are going to say “I HAVE to subscribe to HBORadio in addition to Pandora, because HBORadio is the only place I can listen to that new Heavy Metal band ‘Game of Thrones’.”

        The music ecosystem has complained for a while about there being less money in music than, say, 20 yrs ago. Streaming seems to me likely to exacerbate that — basically like radio, only without the followup sales of vinyl and CDs that actually made the money for radio.

      • charly

        If you exclude the analog part of music industry (pressing plants, shops, trucks that drive to shops etc) than the amount of money isn’t that different compared to 20 years ago and there is a possible 4th tier in higher bitrate

      • handleym

        And on cue…

        (I saw this after I wrote this post, but it’s as obvious as the fact that within a year or two pretty much every Android phone will come loaded with crapware and spyware, just like PCs today.
        There are recurring patterns in business, and if you’re a commodity, your options are limited.)

      • obarthelemy

        Cable has successfully bundled content and tubes. ISPs are inching to that situation, initially with data caps + free-pass deals, probably with an eye later on to changing that to joint subscriptions that will make switching a lot harder.

        When today’s tweens get 30, rich, and used to an infinite supply of music, they’ll face either keeping paying ad infinitum to rent songs, or buying them outright for a large initial expense.

    • AlleyGator

      Have you heard of this product called iTunes Radio?

  • markrogo

    You lose me in the last couple of sentences, Horace, Not sure what point you are making there.

  • Giovanni

    Hi Horace. Clear and insightful article as always. Let me understand a little better: where do the “Developer Membership” that Apple charges to developer go in all of this?
    Is it part of the “Apps”, of the “Licensing” or is it a completely different revenue stream and it’s not present in the graphs?

    I always thought that it was a huge win for Apple to charge €79 per year even to developers who don’t make any money (either because they sell free apps or because no one purchases the paid ones).

    • Developer membership fees go into Services/Licensing/Other. Apple has about 275,000 registered iOS developers. The fees from this service are about $6.8 million/quarter or about 0.4% of Services/Licensing/Other income.

    • Walt French

      So, it’d be a bigger win if they charged €790 for a shiny decal and a T-shirt?

      People voluntarily pay those fees because they value what they get—the ability to distribute apps. (The tools+doc is free.) The fee is but a tiny fraction of the time value of labor to design, develop, market and support an app; people obviously are getting something useful when they switch from being non-payers (as I am) into app distributors.

  • DesDizzy

    I think the benefit of this sort of analysis is not what it says about Apple in of itself, but how this “eco-system” compares to the four horsemen i.e. Amazon, Facebook, Google and Microsoft.

  • jinglesthula

    Horace, you are the king of concluding posts with pithy zingers. much respect

    • markrogo

      I actually don’t understand the last paragraph. Can someone sincerely explain to me the entirety of it.

      • strategy

        Amazon has created a business on retailing and services without making significant money from their own attempts at hardware, and the last paragraph questions this strategy.

      • markrogo

        OK, thanks to both of you. Makes more sense to me now what Horace was saying.

      • I enjoy these zingers as well. Correct me, but it seems Amazon and Google are the popular targets here.

  • SockRolid

    Eventually, Apple will need to move their hardware into the near-luxury and actual luxury range to maintain profits and to avoid commoditization (and the classic race-to-the-bottom). And they will also need to ramp up their iTunes / software / services revenue in many industries.

    So far, it looks like they’re well on their way to doing both. Hiring luxury brand executives (Ahrendts, Dre, Iovine et al). And integrating their infrastructure into automotive electronics with CarPlay and Siri Hands Free, retail venues with iBeacon navigation and notifications, mobile payments with the Touch ID authentication framework iOS 8.

    And, looking a bit further ahead, Apple could roll out a turnkey EasyPay solution for retailers with security, inventory management, and no-line checkout. And Home Kit in iOS 8 for home automation and hotel door lock/unlock and checkin/checkout, and Health Kit in iOS 8 for personal fitness tracking and for health care establishments. And of course iAd for some future Apple television disruption. But the latter might take 10 or 20 years.

    • AlleyGator

      “near-luxury and actual luxury” is a weak characterization of them, because that would shift them into the weird state of being the status symbol that everyone has… it makes no sense. Apple is less about luxury goods than professional-grade goods. Many of their products are devices with reliability that far surpasses the average consumer grade product (and are priced as such). This is part of the reason why their problems get so much attention (Antennagate!).

      • obarthelemy

        Most “luxury goods” can be had by pretty much anyone in the developed world: branded clothes/accessories, spirits, even cars… Apple is far from alone in being “luxury” while being very accessible.
        The professional-grade question is completely distinct. I’d argue that “luxury” is mostly about branding, perception, looks and peer pressure (and process, Luxury brand seem at pains to stress that not only the product, but also the design and manufacturing of it, are luxurious), while professional-grade is mostly about features, durability, performance, price-effectiveness….
        I view the two as at least orthogonal, probably even contradictory, and Apple firmly on the “luxury” side.

    • “Luxury” is a term that is misunderstood or at least misapplied. Simply being expensive does not imply luxury and there are many luxury items which are not expensive. When a product sells in the hundreds of millions it’s hard to justify it as luxurious. Our lives are those of extreme luxury compared to even what royalty could experience a century ago. Rather than get tangled up in the connotations why not just apply jobs-to-be-done segmentation?
      Luxury brands like Burberry have grown so much that they are in many cases more common than non-luxury brands. Have the luxury brands disrupted the commodities? Only if they are seen as solving jobs to be done that were left unsolved. The apparel, jewelry, cosmetics, alcoholic beverage, fragrance industries (i.e. anything in a duty-free store or international airline in-flight catalog) are all exercises in job to be done optimization in what otherwise would be pure commodities. They are luxuries for everybody.

  • yetanothersteve

    That’s an absolutely stunning collapse in music sales in a short period of time. While there’s been plenty of talk about a shift to streaming (maybe enabled by LTE?) I’ve never seen numbers… and never seen adjectives that would describe the numbers my eyeballs seem to see (like off by 2/3.) Hard to believe that streaming services are making up for the loss of revenue to the music industry either. Are you sure of your numbers?

    Likewise it would imply that Apple has lost its position as #1 US music retailer, unless physical music sales have collapsed similarly rather than continue their long term decline.

    • AlleyGator

      Apple released this thing called iTunes Radio. Have you heard of it?

      Apple believes in self-cannibalization. Streaming music was already gaining ground; Pandora has been one of everyone’s most popular apps since 2008 and Spotify was an instant hit when it came to the USA. Apple clearly decided that they were either going to lose their music sales to someone else’s streaming service or to their own. They went with their own.

      • charly

        Ipod had a very high market penetration in the market for people who buy music. Iphones don’t have that very high penetration so a only on Apple hardware strategy could succeed in the ipod era but not in the iphone era.

    • obarthelemy

      Music sales are being hit by a triple whammy:
      – anomalous price for streaming,which makes streaming much cheaper than buying
      – very high price for local storage (Apple-specific issue, mostly) which makes buying your own music pointless for mobile uses.
      – plus scarce local storage has to be shared with apps (which MUST be local) and video (which is harder to stream)

    • The music downloads are a function of Apple’s reporting of revenues. Whereas iTunes revenues have been largely unchanged for the last 18 months app revenues (derived from payments to developers) have more than doubled. That implies that as Apps grew, Music must have shrunk. Although there are other media, they are not big enough to affect the equation (and they are likely to be growing, especially given the larger base of Apple TV). Apple also reported song downloads more recently (10 billion in last year) but they included in the figure streaming “downloads” which makes it impossible to confirm paid downloads. We don’t know how much of the streaming revenue is offsetting loss in download revenues, but it must be something.

  • cleveridea

    If Google were clever they would do a deal with all the music labels to allow a youtube video licence of any song, as a soundtrack for youtube videos, for $1 per indivisible minute per video. Millions of people would use this facility and the labels would earn hundreds of millions of dollars of completely new revenues from their music.

    But the labels would never agree. 1 puny dollar for worldwide distribution rights, for a song that would normally licence for ‘000s of dollars, no way! Their instincts would lead them to haggle for national boundaries for distribution and higher prices. Which is why the music industry has such problems making money outside of live events.

  • obarthelemy

    I’m curious about what is included in services+licensing, since that part seems to be both the biggest and the faster growing. I’d assume it’s subscriptions (DropBox equivalent, photo album, …) and fees paid by makers of Apple-approved peripherals (cars, lightning cables, …)?

    If that’s the case, then it’s bad news for other OEMs (Amazon especially) who lack that part of the ecosystem, and will have to make do, at best, with only the “content” part, whether media or apps, assuming they do have a content shop.