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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
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.
More Caffeine. NOW
if they can't make money at $.99 a song, then why are 20 companies popping up every week doing the exact same thing with no hardware business?
MARIJUANA, SHROOMS, X: ONLINE?! - E
I don't mean to sound rude, but wasn't this the business model all along.
1. Create Cool player
2. Distribute Content for cheap
3. Become Standard by which everyone else judges you by.
4. Establism market dominance
5. Profit on Player!
6. Raise price on Content or lower cost of distribution.
7. Profit on Content!
I don't seen anything new or mysterious there... And for the rest of you, you now have a couple more steps on that profit model you've been working on!
Ted
Fantasy remains a human right; we make in our measure and in our derivative mode... -- JRR Tolkien
The original article should be modded -1 flamebait -- too bad it's not on Slashdot. It's a rather impressive collection of loaded terms and inflammatory phrases.
"They redundantly repeated themselves over and over again incessantly without end ad infinitum" -- ibid.
They have created a brand that goes beyond Mac. Now they have Windows users using a Mac program! And Microsoft can't stop them! Even if they do break even they will see the profits when people see that they can actual program and switch.
Paint.NET, a Free Image Editor, with Source Code Available!
Exactly - if it were true that Apple's intentions were to only make money off the ipod, they WOULD support .wmv. However, they don't because they want CONTROL over online music distribution, and seem to be sacrificing a profit to get there. I supposet that's kinda like M$ and the Xbox.
I am surprised that no one yet has pointed out the ramifications of Jobs' revelation: a loss leader is an anti-competitive practice --it's actually illegal in a few countries, although nowhere in the US AFAIK. The fact that Apple can afford to sell songs for 99c/song because they make up their operating profits on iPod sales means two things:
1. No company that does not sell hardware can afford to compete with those that do in the online music store business (i.e. Apple, Dell, Samsung kinda).
2. The prices of the aforementioned units that subsidize the stores are artificially inflated by the amortized costs of the online music store operations, or expected growth. I.e. the iPods are indeed too expensive.
Either way, this does suck. And it sucks because the magic price-point.
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.
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.
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.
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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.
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.
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.
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.
"Things are more moderner than before- bigger, and yet smaller- it's computers-- San Dimas High School football RULES!"
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.
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 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.
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.
---If you can't trust a nerd, who can you trust?
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).
No guarantee that this is accurate.
Source
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.
Only on
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.
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>
Catherine
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