Apple has always maintained the iTunes Store as a loss leader in the market that is they don’t make any money from iTunes Store sales — most of the money goes to the content companies who put their content up on iTunes and whatever is left over Apple spends on updating the iTunes Store and expanding bandwidth to the iTunes Store. Their main reason for operating iTunes Store is to promote sales of new iPods, and now iPhones and Apple TVs.

Recently, some analysts involved in the rumor business have speculated that recently iTunes Store has just become profitable for Apple. iTunes has been unprofitable to Apple for years in itself but drove more and more people to buy iPods. To date in the video games console industry Microsoft similarly sells the XBox 360 video games consoles, and the previous generation XBoxes at a loss to gain market share and worry about profitability later.

DRM is nasty — I don’t shop iTunes lately anymore at all — for music or video — I only use it to update my podcasts and apps from App Store.

Your comments are at odds with what the vice-president of iTunes has said. Care to elaborate on your source?

And I think you have it backwards. Microsoft takes a hit on the Xbox 360 consoles and makes it up with the game sales. That would equate to Apple taking a hit on the iPods so that they could make their money in the ITMS, not the other way around.

For instance, let’s say that Apple loses a penny for each song purchased. Well, it wouldn’t take long for someone to kill the profit Apple made off an iPod by filling it up with purchased music. A 32GB iPod Touch (which is probably the most profitable per GB for Apple in the iPod line) is $399 and holds, according to Apple, 7,000 songs. If someone were to fill that iPod with ITMS music, at a penny loss per song, Apple would lose $70, which would probably seriously cut into their profit on the Touch in the first place. As such, one would think that Apple would try to dissuade use of the ITMS, whether people had iPods or not. Sorry, that just doesn’t make sense to me, particularly when one looks at Genius and how it encourages more and more ITMS purchases. I think Apple makes a profit on both iPods and ITMS tracks.

As for the profitability of ITMS, well, their main expenses are development and bandwidth. I would hope that they’ve been profitable for some time. But I guess the initial outlay of cash to develop the platform might have taken some time to recoup.

So… apps, eh? Does this mean you finally took the plunge and got an iPhone?

-Mike

Okay perhaps I was too vague in my earlier post — in the case of Microsoft yes they do make up for the losses in their XBox dvision with game sales — my point is at present the console is itself being sold at a loss. In that regard so is Sony’s PS3 even if they are making money from game sales, and Blu Ray Disc movies.

Nintendo actually makes money even on the console sales from what I’ve heard — they use cheaper hardware than both Microsoft and Sony — it is cheaper for Nintendo to make Wiis and then they can sell them at a profit in addition to the games.

Your right about one thing they may want to make iTunes profitable — and may have wanted too all along even when it wasn’t but for a while at least the prevailing opinion and belief was that they could sell content on iTunes just to promote further sales of their own hardware products.

Even when people don’t shop iTunes they still buy iPods — neither of my parents has an iTunes Store account but have iPods. In regards to your statement “As for the profitability of ITMS, well, their main expenses are development and bandwidth. I would hope that they’ve been profitable for some time. But I guess the initial outlay of cash to develop the platform might have taken some time to recoup.” I would like to add that yes it did take some time to recoup (or will if they haven’t done so yet) — what I mentioned occurred before the Vice President of iTunes said what he did. So yes today Apple does make profit on iTMS and iPods and wants to continue doing so but when they first started iTunes Store — the first few years they operated as a loss — they attracted lots of market share and sales for the content companies setting up shop on iTunes but no real profit originally for Apple. However, as you have stated and the Vice President of iTunes has done so the situation has changed. I am not getting an iPhone because I don’t want to to switch to AT&T but plan to get the iPod Touch asap.

Whatever aoos I have by the way I had already purchased — there are no new apps I am buying.

One thing I have noticed often (and its a common misconception possibly) when Apple promotes software they develop that works with both Mac and Windows like say when they mention iTunes they say its Mac and PC compatible — however, PCs in general are capable of running other operating systems than Windows like Linux. iTunes is not available for PCs running Linux. Also in my last post I made a typo in the last sentence about the apps I have through iTunes I said “Whatever aoos I have by the way I had already purchased — there are no new apps I am buying” I meant to say “Whatever apps I have by the way I had already purchased — there are no new apps I am buying.”

I’ll go you one better. If you define “PC” as a set of hardware specs, then Macs are PCs too (ever since the Intel Macs). The only difference is the EFI rather than run-o-the-mill BIOS. But they will run Windows and Linux easily.

The term “PC”, however, seems to have come to mean a “Windows PC”. But you are correct. There are many many operating systems that could run on PC hardware that are not Windows (many flavors of Linux and Unix, various DOSes like PCDOS and MS-DOS, OS/2, etc.). There is even a USB dongle now that emulates the EFI and allows OSX to be installed on regular PC hardware. And hey, there are even some Windows OSes that won’t run the Mac software (Windows 1.0, for instance).

In the end, I think the thing is that Apple just doesn’t want to say “Windows” on their site. Anything that makes people think of the competition, in any way, is bad.

-Mike

That is a good point — by the way what did you think of my previous post before the one you just replied to in which I said “Okay perhaps I was too vague in my earlier post — in the case of Microsoft yes they do make up for the losses in their XBox dvision with game sales — my point is at present the console is itself being sold at a loss. In that regard so is Sony’s PS3 even if they are making money from game sales, and Blu Ray Disc movies.

Nintendo actually makes money even on the console sales from what I’ve heard — they use cheaper hardware than both Microsoft and Sony — it is cheaper for Nintendo to make Wiis and then they can sell them at a profit in addition to the games.

Your right about one thing they may want to make iTunes profitable — and may have wanted too all along even when it wasn’t but for a while at least the prevailing opinion and belief was that they could sell content on iTunes just to promote further sales of their own hardware products.”

Also I just found this link that talks about the music companies frustrations with iTunes and that “Apple keeps 30 percent of the price of each music sale — whether its a 99 cent track or a $10 album, , according to people in the music industry. Apple has said it makes little profit from iTunes because of the costs of running the online store. ” Here’s the link http://www.readingeagle.com/article.aspx?id=109438

That passage is near the bottom of the page under the heading iTunes rapid growth. Yes today Apple may have turned a profit on iTunes but it wasn’t profitable when they first started the iTunes Store. Likewise the Apple TV has not been a profitable business as much as Apple wold like it to become one. It’s still a hobby!

Well, the phrase has always been “give away the razor and sell the blades.” The point is, in this type of system, the singular item is sold at a loss but the multiple items that go with it are sold at a profit.

So, it wouldn’t make sense for Apple to sell iTunes songs at a loss to boost iPod sales. In fact, since neither of these products absolutely requires the other, I would wager that Apple is taking a loss on neither of these. After all, one can listen to ITMS tracks in iTunes on a computer, and one can also place non-ITMS audio tracks on their iPods. Basically, they complement each other.

I have no problems with Apple keeping 30%. Seems like a nice round number. That’s the same percentage they keep from iPhone Apps.

I think it’s well-established that the challenge for artists in their profit margin is the labels. I just would love it if the artists could cut out the middlemen and take their music directly to the fans via the internet, ITMS, Pandora, however.

-Mike

I never said I had a problem with Apple keeping 30% I was mentioning that is the cut they do get. I was also saying that originally when Apple first launched the iTunes Store it seemed like a tactical and strategic ploy to promote increased iPod sales — all the money went to the content companies and Apple was taking a loss. Today they aren’t anymore and the focus has shifted — so today no it doesn’t make sense for them to continue selling tracks on iTunes at a loss to boost iPod sales when they can profit from iTunes too. They did but times have changed. Apple may very well not take a loss as you state on neither iTunes Store sales or iPod sales today. I too by the way would love it if artists can cut out the middleman — it is a fact that most major label music companies underpay their artists — only independent labels treat their artists better and the fans. It was the RIAA which originally pushed for DRM. Copy protection may be included in iTunes content from some independent labels also but they are not the main drivers in favor of DRM. This is why I have joined with http://www.downhillbattle.org that seems to be having server issues every once in a while so their site keeps coming back online and going down again and am today refusing to buy any more music from major labels.

Ending pay for play or payola where major labels pay radio stations huge sums of money — well they bribe radio stations to only play major label music would be good for everyone — except perhaps the RIAA itself, it would help independent musicians and labels thus allowing non RIAA artists to be discovered by giving fans a chance to hear independent music, independent labels pay their artists better and have greater respect of music fans — they don’t treat their customers like criminals. Hence I am only supporting independent music now.

I never said YOU had a problem with Apple’s 30%. You brought it up and I just gave my opinion that I don’t think that’s a bad thing.

You do make a lot of statements about Apple’s profits. Do you have sources for this?

-Mike

I was just stating all the things I heard on Mac rumor websites and all prior to 2007 regarding iTunes. The following page http://apple.wikia.com/wiki/IPod also details this — it may be a bit out of date that is why I suggested iTunes Store may not have been profitable for Apple earlier but now is. It mentions a statement Steve Jobs once made about the iTunes Store delivering very little profit or no profit at all to Apple except when it translates into higher iPod sales.

“iPods cannot play music files from competing music stores that use rival-DRM technologies like Microsoft’s protected WMA or RealNetworks’ Helix DRM. Example stores include Napster and MSN Music. RealNetworks claims that Apple is creating problems for itself by using FairPlay to lock users into using the iTunes Store. Steve Jobs has stated that Apple makes little profit from song sales, although Apple uses the store to promote iPod sales. However, iPods can also play music files from online stores that do not use DRM, such as eMusic or Amie Street.”

So yes I do have some sources I’ve heard this from in the past — I need to Google the information to find it though. Once I have I can keep posting links to places where I’ve read this.

I don’t know everything there is to know about Apple’s profits — I just know what I’ve heard Steve Jobs say and comments by financial institutions whose opinions have been published on the web by mac rumor and news sites. Sometime late last year or early this year at the time iTunes Store surpassed WalMart as the # 1 retailer in the U.S. of music an article sometime later came out saying that iTunes had just become profitable.

Then again, I also read in April 2007 an article on Apple Insider.com titled “iTunes Store a greater cash crop than Apple implies” in which it was suggested despite Apple’s suggestions that it operates iTunes Store at the break-even point a thorough analysis of the service’s economics suggests it turns a profit roughly in line with the company average, with recent events paving the way for even greater gains.

http://www.appleinsider.com/articles/07/04/23/itunes_store_a_greater_cash_crop_than_apple_implies.html