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.

Comments

Theres an industry turn around for you

[CokeJunky]

It strikes me that this is a rare version of the hardware/software business model.

Normally, companies will take a loss on the hardware (i.e. x-box, nintendo, etc) and make up the loss on software..

Oh well, whatever works for them.

Re:Theres an industry turn around for you

[Gumber]

Consoles are often subsidized at launch, but as hardware costs go down over the lifetime of the design, and R&D costs are recouped, the hardware starts to break even, or even turn a profit.

I would take Jobs statements about the profitability of i-tunes with a grain of salt. He has lots of good reasons to "poor-talk."

1st he has a good cover story for Apple shareholders, namely that iTunes is going to help bring in a lot of hardware revenue, with resulting profits.

2nd he undermines iTunes competitors (and potential creditors) by sowing doubt among their investors and creditors. This reduces their wherewithal to ride out the uncertain early years of this new industry.

3rd by undermining iTunes competitors, he strengthens Apple's position in the long run. As competitors falter, Apple can either acquire them, or scoop up their former customers.

4th by undermining iTunes competitors, he strengthens Apple's hand against the recording industry. You have to believe that they want someone who can figure out how to get paid for on-line music distribution. And they haven't figured out how to do it themselves. It is in their interests for someone to succeed.

5th he actually has the wherewithal to ride out the early days of the industry -- they are, in fact, making money on iPods, and the Apple Music store will probably help them sell more of them. As long as he's making a decent return on the hardware business, he can aford to keep the on-line music distribution business unprofitable. Once he's got it tied up, he can squeeze the recording companies.

6th. Just as with console hardware, the economics of selling on-line music is bound to change. Apple has already done a lot of the R&D (and legal wrangling) to get this up and running. Those fixed costs will be paid off. Incremental costs will decline -- Moore's law will make the ongoing operation of the infrastructure cheaper as CPU and memory prices continue to drop. Storage and bandwidth prices will also drop. The market will grow, which means new investments can be amortized over a larger number of customers/transactions.

Wait a few years

[Dr_LHA]

OK - so they're not making money now. But wait a few years. Apple has put themselves in a good position to dominate the market with iTMS. In 5 years time when we're down to the few remaining successful iTMS type places, and the RIAA/Record companies have become hooked on the revenue stream from these sources, Apple et al. will be in an excellent position to renegotiate with the RIAA for a bigger piece of the pie/profits.

Interesting possibilities...

[sterno]

Right now the power here is in that hands of the music industry because most of their music is still sold through the traditional channels. If they didn't feel like selling through ITunes, they could do so with little pain.

Where it gets interesting is when on-line distribution does become the primary distribution mechanism, the music companies are going to lose their power because they no longer hold the keys to the kingdom. Why would an artist sign a deal with Warner or Sony when they could sell music directly to Apple and take home more money?

The failure of the music industry to make a palatable alternative that they can control will be their demise.

Re:bullshit.

[mrpuffypants]

Did you even live through the dot-com bubble? Do you remember when sites like Yahoo!, Excite!, and the other titans of ad-based revenues (or lack thereov) were huge for a while and had hundreds of other companies trying to do the exact same thing fully well knowing that revenues would be slim to none? And after a few years the only services left were the ones that made a real name for themselves, brokered real, money-making partnerships, or that sold their soul to the devil?

That's exactly what I see going on here: We've got iTunes, MusicMatch, Napster, Wal-Mart, MTV, and the others on the horizon that are all going to enter into a market that their accountants probably would advise against but they still do it to try to get a foothold in a new and emerging market. Expect many of them to die off unless they get a viable business model to back up their technical requirements. Apple's got the iPod, Napster has their $9.99 subscription service, and the others have....

It'll be interesting to see the Internet music bubble burst in a year or two. In the meantime I'll keep buying music from iTunes.

The Indie content is the secret weapon for Profit.

[VoxBoston]

Here's my take on it: A bunch of Indie lables and CD Baby (umbrella for lots of tinier labels and individual artists) are going to have their content on iTMS soon.

This is good for Apple - I suspect they're able to keep a higher percentage of the $.99 on those sales. Less RIAA strong-arming, less "fuck you - we're the Rolling fucking Stones" negotiating pressure.

Perhaps the mainstream content is a loss leader to sell iPods (good plan), and the vast ocean of indie content will actually be profitable in its own right.

The RIAA on iTunes

[Crispen]

And to add insult to injury, RIAA's Carey Sherman (at yesterday's Educause roundtable in Anaheim) took a backhanded stab at iTunes claiming it was an "old business model." [One of the new business models he mentioned was an iPod loaded with locked music files -- you pay to unlock each song.]

Sherman's happy to be selling to Apple, but what I gathered from both him and Jack Valenti is that the RIAA and MPAA are hoping to one day force all of us into a utility pricing model. If you pay the monthly fee, your songs and videos will play. Skip a monthly payment, however, and all of your music and videos lock up tighter than a coon dog full of 12 pounds of government cheese.

The sad thing is...

[cryptochrome]

The sad thing is this is what it took to bring the recording industry kicking and screaming into the modern arena of digital music distribution. Apple can't make any profit for something with a lowered distribution cost relative to comparably priced physical media, and are forced to do so indirectly via a locked-in hardware device. I reckon if they could make a profit on the music, the price of the iPod would go down, it would support other services, and iTunes would support other players. If that isn't a pathetic indicator of the greediness and short-sightedness of the recording industry, I don't know what is. I kind of wish Apple hadn't invented iTMS, just so I could have watched the music industry die an ignoble death.

Re:No that's how apple always made its money

[gwernol]

well, if you are not a dumbass, you will know that Quicktime API is for Multimedia in your apps, Carbon is for LEGACY code and porting Classic apps to OS X is a breeze because of it, and Cocoa is for Aqua apps, IE NEW apps.

Thank you, I'm not. Although QuickTime is indeed primarily a digital video standard, it also includes a complete Mac OS-like operating system API in it. Indeed Carbon was originally based on the QuickTime for Windows code base - we ported QTW to Rhapsody and voila, there were the Mac OS classic APIs.

Apple may have intended Carbon to be used for legacy applications, but plenty of new apps are using it. For programmers familiar with classic Mac OS programming, its a much easier leap to Carbon than Classic, so a lot of them develop code using it.

Re:11 out of 99 cents

[mikeswi]

No guarantee that this is accurate.

Source

Apple says iTunes is "better than free" because it's "fair to the artists and record labels." That's simply not true. First of all, Apple gets 3 times as much money as musicians from each sale. Apple takes a 35% cut from every song and every album sold, a huge amount considering how little they have to do.

Record labels receive the other 65% of each sale. Of this, major label artists will end up with only 8 to 14 cents per song, depending on their contract. Many of them will never even see this paltry share because they have to pay for producers and recording costs, both of which can be enormous.

Until the musician "recoups" these costs, when you buy an iTunes song, the label gives them nothing.

About an hour ago I compared 27 songs that I had queued up in my iTunes "shopping cart" against the RIAA Radar search engine. Every single song was from an album produced by an RIAA member. So I dumped my queue and iTunes lost a $26.73 sale. That is my protest against the RIAA's campaign to save themselves and other buggy whip industries.

I wonder too....

[sakeneko]

Fact is, I never did do Napster, and never have downloaded music except for an occasional song off of a legitimate band web site. I didn't because I wasn't willing to take stuff and not pay for it unless the artist wanted to give it to me. So, until iTunes became available, I missed the digital music revolution almost entirely....

And I LOVE IT. I love being able to buy and download exactly the songs I want -- particularly specific rock or pop or country songs I love by groups whose other stuff I don't much care for.

I want iTunes to succeed. It's opened a new world to me. And if it doesn't make money, I wonder if it will stay around. <sigh>

Re:No that's how apple always made its money

[topologist]

gwernol knows what he's talking about. Quicktime does indeed have a relatively self-contained (and ancient) mac os-like services layer that has been ported to windows as well, and I believe iTunes for windows uses those APIs (which is why it's so bloated). Most developers arriving or porting from other platforms (or indeed, from OS 9) are far more familiar with C++ than with Objective-C (which, while quite a useful language, certainly has its own share of performance problems - dynamic binding and typing don't come cheap, and function call costs are relatively high, for instance), and tend to use Carbon, even though it was originally intended as a compatibility layer. However, if you stick to one programming model (Cocoa and ObjC, for instance) programming for OS X is much easier than doing say MFC for windows.