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Apple Makes no Profit from iTunes

Posted by Cliff on from the loss-leader dept.

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.

1 of 451 comments (clear)

  1. Re:Hm... by bastion_xx · · Score: 5, Informative

    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. :)