The iTunes Store Becomes Big Business

02/12/2014

A recent report from Horace Dedieu of Asymco has highlighted how the iTunes Store has become big business. (When I say “iTunes Store” in this article, I include all of Apple’s digital sales platforms: the iTunes Store, the iOS App Store, the Mac App Store and the iBooks Store.) Apple’s 10-Q form cites the following:

The iTunes Store generated a total of $2.4 billion in net sales during the first quarter of 2014 versus $2.1 billion during the first quarter of 2013. Growth in the iTunes Store, which includes the App Store, the Mac App Store and the iBooks Store, was driven by increases in revenue from App sales reflecting continued growth in the installed base of iOS devices and the expansion in the number of third-party iOS Apps available.

As Dedieu points out, these revenues are Apple’s net, not the gross sales from the iTunes Store, Mac App Store and iBooks Store. The gross, according to Dedieu, is nearly $7 billion per quarter. (I disagree with this number, however; I think Dedieu calculated this on the basis of the $2.4 billion being 30% of the total, and Apple is certainly counting 100% of sales of its own software, unless they’re treating the iTunes Store as a separate business unit.)

Two elements in Didieu’s article are interesting. The first is the rise and fall of different types of content in the iTunes Store. Apps are up 105% in the full year 2013; third-party content nearly 47%; yet music downloads have dropped 14%.

The other takeaway is that the iTunes Store’s gross revenue is about half that of Google’s core business, and that the former’s growth is much stronger than Google’s.

Screen-Shot-2014-02-10-at-10.03.55-AM-620x420.png

Graphic from Asymco.com

The iTunes Store would be number 130 in the Fortune 500 if it were spun off.

All this is interesting, but it’s incidental to Apple. The main reason for the iTunes Store is to keep users in the Apple ecosystem. I’m sure Apple is delighted to make a couple of billion dollars from the iTunes Store, but they’re happier still to sell boatloads of iPhones, whose users buy content from the iTunes Store. Initially, the iTunes Store wasn’t designed to make a profit, and, for years, Apple wouldn’t cite figures regarding sales in the iTunes Store. (And it’s not clear how much profit Apple actually gets from the iTunes Store.)

Even changing the price of OS X from $20 to free hasn’t harmed the bottom line; on the contrary, it’s another selling point to convince people to buy Macs. If you can be sure that future OS upgrades will be free, you know that you won’t have to shell out several hundred dollars to keep your computer up to date during its lifespan.

No matter what, it’s clear that the iTunes Store is one of the linchpin’s of Apple’s success. The ability to provide a seamless experience for providing media and apps has proven, since the introduction of the iPod in 2001, to be the smartest move Apple has ever made.