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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.
I wonder if anyone but RIAA makes money on this? Artists? Do the credit card companies make money on this? They probably make a mint! Methinks that Apple should be able to strong arm Visa a little into better rates on micropayments.
#define DRM chmod 000
if they can't make money at $.99 a song, then why are 20 companies popping up every week doing the exact same thing with no hardware business?
MARIJUANA, SHROOMS, X: ONLINE?! - E
My Linux Command of the Day site : LCOD
I don't mean to sound rude, but wasn't this the business model all along.
1. Create Cool player
2. Distribute Content for cheap
3. Become Standard by which everyone else judges you by.
4. Establism market dominance
5. Profit on Player!
6. Raise price on Content or lower cost of distribution.
7. Profit on Content!
I don't seen anything new or mysterious there... And for the rest of you, you now have a couple more steps on that profit model you've been working on!
Ted
Fantasy remains a human right; we make in our measure and in our derivative mode... -- JRR Tolkien
So they are selling songs for 99 cents and they keep none of that? Where does all that money go? I know it doesn't go into the syringes of the musicians. correct me if I am wrong, but wasn't the internet supposed to put more money into artists pockets wtih all this "direct to customer" type stuff?
The original article should be modded -1 flamebait -- too bad it's not on Slashdot. It's a rather impressive collection of loaded terms and inflammatory phrases.
"They redundantly repeated themselves over and over again incessantly without end ad infinitum" -- ibid.
They have created a brand that goes beyond Mac. Now they have Windows users using a Mac program! And Microsoft can't stop them! Even if they do break even they will see the profits when people see that they can actual program and switch.
Paint.NET, a Free Image Editor, with Source Code Available!
Since realizing profit from a particular endeavor can be manipulated with extreme flexibility, claiming no profits could easily be a method to discourage competitors. ...Dear competitors, gee this is a tough and profitless market, that is absolutely not worth your time. Please pursue a profitable venture while we foolishly throw away our money, sincerely
Steve Jobs
Apple has always lost money software as a driver for hardware sales. Do you really think they make money on Panther? they sell it for less than MS sells their OS and to a lot fewer people. Yet it (OBVIOUSLY) contains a lot more research and effort so their costs are much higher and profits not much on software.
Some drink at the fountain of knowledge. Others just gargle.
Apple's strategy is simple, but counterintuitive if you are used to thinking of things separately.
/might/ not be sustainable, but over the long run will break even as their costs go down. Where they make money on this deal is in the sale of the iPods, which cuts the sting of loss by a good bit. Their hardware is cheap (they get XServe RAIDs at cost) and long term expenses seem to be (relatively) low.
Apple has had a dramatic increase in the number of sales of the iPod and have established market dominance with the iTMS. It
In short, they are taking a business risk. its a business risk, but the potential for gain is good (by being first to market, having the best mindshare, and having a secondary product which will make money), and I am positive that I would call it "potentially fatal" or reckless, which is what the Register seems to imply.
Integrate Keynote and LaTeX
In the case of Apple they certainly have development costs, equipment costs, bandwidth costs, etc. And they are certainly accounting for those costs in such a way to make sure that no profit is seen at the ITMS. For instance, iTunes, which was previously a perk of the OS, can now be funded by the ITMS.
Apple would want to do this for two main reasons. First, a highly profitable music store might invite more competition. Second, as download sales increase, they will likely pressure labels to give Apple more of a cut. This will be easier to do if the music store regularly loses money.
I expect the general media to miss such observation. What is funny is when the like of Fortune and the WSJ does not account for such factors.
"She's a scientist and a lesbian. She's not going to let it slide." Orphan Black
What an absurd article.
Apple has a product (the iPod), upon which it makes a lot of money. Apple creates a system (iTunes and the iTunes store), whereby it can drive more sales of its product.
Now, I am supposed to be upset with Apple because it doesn't make money providing the media service, and it cooperates with the RIAA's licensing demands to do so.
Furthermore, I am supposed to prefer the idea of a 1-cent tax on my blank CD, or an addition to the income tax.
The mind boggles. Who should administer the income tax disbursements? How should the money be allocated? By volume? To promote a social musical agenda? Why should my CD carry a surcharge if I only want to burn a Linux distro, or back up my stuff onto it?
DRM is a big problem, sure, but this offers no answers. Apple is trying to build a dominant brand in the digital media distribution business, and doing well at it. For now, to offer the digital media that people want, Apple must deal with the gatekeeper to those media. That gatekeeper is the RIAA. Perhaps that will change someday and Apple or somebody else will be able to make money. For now, it seems reasonable enough to me that Apple is providing a service in the only manner in which the service can be realistically provided, and positioning the traffic and customer base to equate digital media with iTunes for the future.
The difference between other industries is that software by nature seems too easily distributed illegally, and therefore without revenue. It's not like physical consumables which aren't duplicated/shared by the consumer.
--------------------- Eddie Liu.
Reading the article at the Register... it sounds like they're blowing things out of proportion. The quote from Jobs that they focus on is: "We would like to break even/make a little bit of money but it's not a money maker."
While this could mean they are taking a permanent loss, it could also mean it is a slow profit that hasn't quite surpassed the initial one time investment portions of setting up iTunes... Or, it could even mean that they do break even or make a very small profit, but the profit is so small that in the large picture of the companies profits it comparatively makes no money...
I'd want to see some actual numbers and the real math before coming to any conclusions... The article simply jumps from the quote that iTunes isn't "a money maker" and enters areas of rampant speculation, leaning a little in the tinfoil hat direction.
Well, I can say that in their current position, it looks like record companies can ensure that online music distribution never becomes the main distribution medium. They are the ones setting the prices at which the music must be sold. As soon as the 'middle man', in this case Apple, starts getting too powerful, all they have to do is raise the cost of the music to Apple, thereby starving them of money. The whole point of the article is that Steve Jobs is just offering his company up for slaughter by the record companies. Apple will never become the primary provider of content if they have to compete with the record companies on their terms.
Now, whether this will actually happen, I dunno. I think Apple's strategy is a little more short term than this...
Umm, this is Apple. They've always taken a loss on software to drive hardware sales. Why do you think they don't sell the clearly superior OSX for x86 systems, where the OS itself could pose a much greater threat to MS than OSX for PPC only? The money, for them, is in he hardware, and always has been.
But there are serious problems that will prevent this from happening, however wonderful it might seem:
1) Different people listen to different quantities of music. Someone who downloads 500 songs per year will therefore make the government pay 500 times as much money to the artists than the guy who only downloads one song. If I were that guy downloading one song, I'd not be too pleased about paying for some guy I don't know to listen to some artist I might not even like.
2) If there is no cost incurred to the user for downloading a song, many people will download huge numbers of songs, many of which will simply get thrown away. A song with an attractive name might get many downloads, even if no onne likes it. A corollary problem is that of bots being used to increase an artist's download quantity, and therefore unfairly make him money. There is, of course, no 100% reliable way to distinguish between a bot and a human.
3) There would be no way to track exchange of songs. If the songs have no DRM-like restrictions, than I can give a copy to my friend, an no one will no about it, so the ratings won't increase correspondingly. Even with the most advanced statistical methods, it is not possible to know just how many copies of a song have been made unless one actually does a study for each song (different songs that appeal to different demographic sectors will be copied more or less, etc). The only solution to this would be to somehow institute a mandatory reporting system, by which the federal government would know each time a song changes hands... but I'm sure such a system would not appeal to all you anti-DRM folks, as it could concentrate a frightening amount of personal information in the hands of the government.
4) What about international downloads? Would this just be the US government funding this with US taxpayer dollars? Or a consortium of countries? But what if one country downloads more music than another, and how do we farily assess which countries download what? Frankly, it'd be hard enough to get the US government to implement such a scheme without making it suck incorrigibly; I certainly can't imagine UNESCO, the WTO, or another international body doing it.
5) Even though distribution costs are small on the internet someone still needs to supply the servers from which songs are downloaded before they are shared. As it would be impossible to do this profitably when one could just get the songs from a P2P service, this too would have to be run with taxpayer dollars.
6) Most people of the free world--especially Americans--are mistrustful of the government interfering in markets, especially when it come to effectively monopolizing information markets as public goods. This belief is certainly not just superstitious, and it prevails regardless of how noble the intent of such schemes. Therefore, it would be damn hard to drum up popular support for such an initiative.
Conclusion:
The arguments above are just one example of how totally free exchange of intellectual property simply can not provide the producer with fair compensation. The idea is almost a contradiction itself. In economists' language, the Internet provides us with the power to treat what is still a scarce economic good as if it were a free good--ie, common property. Yet the Tragedy of the Commons remains painfully relevant: in the end, someone has to pay.
--AC
Well, in this case not RTFA has degraded what could be an interesting debate on Slashdot.
So, for those of you who didn't take the time, the author of the article seems to suggest that creative works will be payed for by taxes. By paying the taxes, we will all legally be able to download and share at will. He also suggests that this is the accepted and expected outcome by those in the know.
First off, I have never heard this point ever seriously considered. If it is, however, I am incredibly concerned. Do we really want creative works to become a socialist venture? What happens when artists sing controversial music, especially that which goes agains the thinking of the government? Would the government just revoke their payments? What would the US have done in the 60's if it was footing the bill for both the Vietnam war and the artists who were crying out against it? What would foriegn governments do?
I'd rather keep music in the free, open market so I know there is no pressure on squashing dissident views from artists. Artists have historically brought about the greatest changes in thinking. This would be much tougher in a creative-socialist market.
-- Fighting mediocrity one bad post at a time.
[note: I'm going to pull a lot of numbers out of my ass for this post, but it should, at the very least, help you grasp the magnitude of the iTMS business.]
... that's after the RIAA, credit card companies, and music labels get their cuts.
... exciting stuff, but I think most of the expenses here can be rolled into the people section above, and the initial investments below.
.. that comes out to about $100k per week.
... we've accounted for about 75% of the revenue generated by those itty 34 cents per song. The other 25%, or $125,000, gets shuffled back into a bank account to repay the initial investment. At the current rate of 1.5 million songs per week, that's about 6.5 million bucks in a year.
Several people have pointed out that Apple's slice of the pie is 34 cents per download
Last week people downloaded 1.5 million songs from iTMS. That breaks down to about half a million bucks in revenue, per week, give or take a smidge.
Lets see where that money goes:
- People! The big money burners. If the average salary of a person working in the iTMS department is $60k (a tad high, I think), it would take 400-something employees working exclusively on the iTMS project to eat up all that cash.
- Hardware! Well, they probably have a nice contract with Akamai for content distribution, and/or fat pipes at some fancy data centers (think Exodus/C&W). If they're payin' $2M a year for iTMS hosting services alone, including hardware and what-not, that's about $40,000 per week. It could be double that, it could be half that. Hard to say, but I have a hard time thinking it would eat more than 20% of their weekly revenue ($100k).
- Development! iTunes for Windows and Mac
- Advertising. Hard to say how much advertising costs, because they're "integrating" iTMS ads with all their other campaigns too: iPods, iMacs, and other iDoodads. Hmm. Lets say they're dropping $5M over the course of a year to promote iTMS, in addition to everything else
- The initial investment. This is probably why they're not "profitable" yet. Getting iTMS off the ground with that much content and usability testing probably put a dent in the war chest (which still has a few billions in it).
So, looking at this on a weekly basis: people (~200k), infrastructure (~75k), and marketing (~100k)
This is, of course, before the big promotions kick off, and before the Windows market embraces (maybe) iTMS.
I think the future is bright for Apple, and the notion that they're not going to make any money on iTMS is ridiculous, as is the idea that iTMS is merely a prop for the iPod.
---
So, considering my disclaimer at the top, I'm VERY keen to hear what other people think of these estimates. Did I miss anything big? Should I have gone to bed an hour ago?
Cheers!
Of course they make REVENUE. Revenue is all the income produced (at least $3 from me!), while PROFIT is revenue after income. It looks like the reporter never took economics 101... I expected more from The Register
What was said is that the competitive landscape is very challenging, and by being the largest store and having all this infrastructure up, might end up gaining a small profit in a few years. Right now it's time for investing, but sometimes it might pay off. And the punchline was that Apple might end up gaining a small profit while the competitors, lacking many part of the infrastructure, will not even gaining some profit in any foreseeable future.
There you have it. Completely different context. You can hear Jobs' words by yourself, the audio of the analyst meeting is online (it's the Q&A part, all in glorious quicktime).
>The Register has an article about the lack of profit from iTunes.
Not 'iTunes'.... ITunes is free. Of course there is no profit.
The profit, or lack thereof, is in relation to the iTunes Music Store.
I wish I had mod points for the parent post. Microsoft is making money by trying to control something that can't really be controlled perfectly, namely software. I remember Apple being described in derisive terms not too long ago as a hardware company. It seems to me that hardware is the only thing you can realistically manage. Regular software will be pirated and heavily DRMed software is a headache, but shiny new, cool hardware with accompanying software that works well is a good bet. It can't be copied too easily and people like buying tangible things that they can show off to friends.
http://www.rootstrikers.org/
Listen to what Jobs said - at $0.99 per song, you can only breakeven at this business. He is talking to analysts, analysts who are also gonna talkto DELL, Wal-Mart, MTV, Napster, et al. Jobs didn't say it's a loss leader, he just said it isn't very profitable and basically breaks even.
... iPod. They do all work with a myriad of competitors and they themselves all compete with a comodity product - the WMA music file.
(Now, add volume on the order of magnitude of 80% of all music sales, not just on-line...and you have a position of strength to negotiate all your direct costs, an economies of scale for your indirect ones - but that's another econ lesson)
So he is casting FUD onto the longevity of those competitors. What is also important to note is that NONE of those services work with the worlds #1
Now listen up - this is important - the WMA music file is a comodity because if it costs $0.99 from Wal-mart or MTV or Napster or DELL, then why should I buy it from any of them? They will either have to add value to it by making the shopping experience easier, or lower the price. Assuming it can't get easier than 1-click shopping (Apple and Amazon exclusives) or rich browsing/searching content of which most services have, then that leaves price.
Which brings us full circle - if WMA music files are comodity items that can only compete on price, and if at $0.99/song, a music store isn't significantly profitable, than prices will drop until the competition goes out of business.
That is what Jobs said.
I only came here to do two things; kick some ass, and drink some beer...looks like we're almost out of beer.
you can turn that meme into a molecule and introduce it into the water supply on this planet?
It would save us all a lot of time.
+&x
Let's think about this for a moment and puzzle out why Apple might be willing to have iTunes Music Service be a loss leader right now.
Now, most folks thinks this is so that they can sell iPods. And while I think this is probably part of the reason, I think there are other reasons.
In fact, it could be argued that the zero margins on iTunes Music Service and the margins on iPods are part of a long-term investment in an even bigger business.
And what might that long-term investment be?
Think about this: currently the RIAA are the gatekeepers to the great libraries of music. They have the talent and content that matters under their control If you are going to get to the music which drives traffic and deals, you have to cut the RIAA in for a piece of the action.
But the RIAA is caught in the fantasy of maintaining a business model which is broken and won't settle for a piece of the action which is less than what they are getting now.
So, you have to make a deal with the devil. You have to give the RIAA a deal which is economically unsatistactory in order to get any deal whatsoever.
Of course, if you have another source of revenue with decent margins, this isn't really all that bad for you. You can give away the blades in order to sell the razors and to establish yourself as the defacto standard. Sound familiar? And you are able to do this without losing money in the process.
Of course, the next time Metallica's or Sting's or Byonce's contracts are up for renewal if they have a savvy business manager, they are going to look at their sales distribution and maybe notice the fact that they are paying a lot to the RIAA to essentially collect a check from Apple, cash it, and then write a check to the artist in question.
How long do you think it will be until some major name breaks ranks and decides to negotiate a contract that cuts the RIAA out of this portion of the distribution scheme and then cut a deal between themselves and Apple?
Once a single name does it, they dam will be broken and the flood will start. Apple will be able to increase the major it gets on each iTune sales and the artists will be able to increase their cut of each song. It will be a win-win proposition for the Artists and Apple, and the RIAA will quickly be relegated the position of being the CD distribution business.
In this play, Apple, the Artists, and the Consumers win, and the RIAA and Microsoft lose. Makes you understand why Microsoft has been attacking iTunes for Windows and the iPod so strongly...
Yours,
Jordan Dea-Mattson