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Apple Makes no Profit from iTunes
Some Beech writes: "The Register has an article about the lack of profit from iTunes. Also mentioned in a Seattle Times article dated 27th October, it seems Apple is relying on iTunes to drive iPod sales rather then being a profit centre on its own." Another reader pointed us to Apple's details from the Analyst Meeting.
A few tens of dollars each? You haven't priced 1.8" FireWire hard drives, I don't think. I'm sure the profit margins on the iPod are pretty good, but they're probably in the 25-35% range, not the 1000% range.
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I write a regular newspaper column about the Mac for The Seattle Times, and had a briefing with an Apple iTunes product manager back in mid-October. I asked whether there would be an affiliate model with iTunes in which referring visitors to specific albums or songs would generate a commission.
The product manager said very clearly, on the record, as he and other Apple people have over the last several weeks, that the margin is razor thin with iTunes, and that they're running the service in order to sell iPods and encourage people to use Macs. They believe that the artists make money on the deal (how much is another issue), and that because they're selling so much related hardware, that's their real business.
So there's no real story here. Apple hasn't been hiding the fact. I mean, this is a low-margin business anyway. Say Apple was charging $1.09 per song and netting 10 cents each. If they sold 10,000,000 songs per month that would be an extra $1 million. Big woop. So it's better for them to keep margins low and sell their very high-margin hardware.
I can't tell you the number of friends who went out and bought new PowerBooks and iPods recently -- the iTunes store just flipped them out and they gave up their old PC laptop. The music will give Apple a larger hardware marketshare.
Freelance tech journalist for the Economist, MIT Technology Review, Macworld, and others
Loss leader means they're loosing money, going into the red. Apple simply isn't making a profit on itunes, they're not loosing cash from it.
Remember, the RIAA is, more or less, a huge umbrella for the big record labels.
It's the labels that make money. Not the stores, and (typically) not the artists.
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The problem is that your artist friend has a sucky contract with a greedy record label. This is true of most artists, especially if they never make it big. Even large artist make more money on concerts, promotionals, etc., than they do on album sales, unless they had a shark lawyer looking out for their best interest at the get-go.
Artist on major labels still receive whatever percentage cut they would normaly received based on their contract with the label. This has absolutely nothing to do with Apple, since Apple doesn't deal with artist directly (well at least not in this arena). Artist on indie labels get a larger percentage of the sale, but that's typically because the independent contracts offer a larger percentage for the artist (not all, but a lot).
So for indie artist, iTMS ends up being a good deal, they get slightly more exposure than they normally would, and people who wouldn't normally purchase an entire album by some random no-name artist, aren't quite as hesitant to by a song here and there, meaning they get an increase in income. Whether or not that income is large is another issue--let's face it some artist will never see more than $10 a year in income from iTMS, but typically speaking these are the same artist who may have never sold 1000 albums/singles without iTMS.
If Apple dealt directly with the artists, I'd expect better. But I also understand why Apple doesn't want to become a record label. They're a technology company, and digital music distribution is basically about technology, signing artists is not.
Yet it (OBVIOUSLY) contains a lot more research and effort so their costs are much higher and profits not much on software.
I don't know about this. I think a lot of the software development costs relate directly to the underlying OS. I've programmed extensively on Windows and Linux, and am just beginning on Mac OS X. However, OS X seems to be incredibly well designed and though out, making the programming process that much easier.
It is much easier for Apple to develop applications for OS X than it is for Microsoft to Windows. Likewise, OS X's architecture is very clean, making it relatively easy to add new features. Windows, however is incredibly kludged together. Anyone who has developed on it can atest to that fact.
Incidently, Steve Jobs addressed this very issue in the analyst meeting yesterday, which can be streamed off Apples QuickTime site. I forget the exact quote, but something to the effect that it is very easy to engineer new apps and features on OS X.
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Once they are established, Visa will have no choice but to lower their charges. Once they get comfortable with that steady revenue, they'll bend over backwards to keep it.
:)
I don't know who is processing on behalf of Apple for Visa/MC/etc, but I'm pretty it isn't them directly. Whoever is processing will have a few fees, negotiable with Apple. Other fee's won't be so negotiable.
Apple is going to pay:
1) Per transaction fee - the cost to send out the tx for authorization/settlement. Visa/MC's rates for doing this are anywhere from $0.015 to $0.03/per tx. Expect Apple's processor to add on an additional 1-5 cents.
2) Discount Rate (or the magical mystical world known as interchange) - This is the ~2-5% merchants pay on the value of the settled transaction. If Joe User buys $100 in songs, Apple will get net settled minus the ~2-5% discount rate, minus transaction and processor fees. Depending upon how Apple deals with the transactions, such as using Verified by Visa (ala 3D Secure) or other anti-fraud devices can reduce the discount rate to about 150 basis points (or 1.5%).
3) Chargebacks - This can be the real killer. If Joe User sees a charge for the iTMS he sez ain't his, he'll dispute the transaction with his issuing bank. Even if the transaction is valid, Apple is going to receive a "chargeback" or retriaval request. The fees charged to Apple for doing this can range anywhere from $0-25/per tx (that's dollars, not cents).
How is Apple reducing these fees? I know in my experience that they group up a bunch of charges for settlement. This reduces the per transaction fee and still gives the cardholder an excellent invoice to reconcile against. This is probably the biggest in that if a user buys a single song per day at 0.99, Apple is probably paying the following:
Authorization fee: 0.02 - 0.05
Discount Rate: 0.02 - 0.04 (% based)
So even in a best-case scenario for this transaction, Apple's looking at 0.08 out of the 0.30 "profit" after paying the RIAA members.
In the grand scheme of things, today there is little incentive for Visa/MC to come up with a new business model for transaction fees. The good news is that things such as PIN-based debit cards, 3D Secure, and smaller transaction size (in dollars) will give them, or their competition, the push to come up with alternatives.
Things such as mobile commerce, where the telco does the billing (and is good at "micro-payments" and monthly consolidation), digital cash, and chip-based stored value cards are some of the major avenues.
For Apple, if they can get the buyers to buy more than 2-3 songs at a time, will significantly reduce their processing rates.
IMO, obviously.