Asymco’s Horace Dediu has estimated that Apple’s iTunes business, initially intended only to cover its costs as a way of driving hardware sales, now earns the company annual profits of a cool $2 billion.
What started as just a music store now sells music, video, books, iOS software, and Mac software. Revenues have grown five-fold in 7 years, with total sales approaching $5 billion a quarter and notching up an estimated 23 billion transactions a year.
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Despite these heady numbers, Asymco believes Apple’s margins on most sales are almost non-existent: just 2 percent on apps and a wafer-thin 1 percent on music. Where Dediu thinks things are different is in the blue area termed ‘Apple Software’ that covers all the Mac software the company sells.
iWork, which includes Pages, Numbers and Keynote ($20 each)
iLife, which includes iMovie, iTunes, iPhoto, GarageBand (free with new computers but otherwise $15 each)
OS X updates (typically $19.99)
OS products including downloads of iOS and OS X. These are mostly free but some OS X updates are not free (typically $19.99 for new version Professional software, including Final Cut Pro ($299.99), Logic Pro ($199.99), Aperture ($79.99), Compressor ($49.99) and Motion ($49.99)
Apple Remote Desktop ($79.99)
If margins here are in line with industry norms of 50 percent, that means Apple makes $1.8 billion a year. Add in the tiny margins from the much higher total sales of other categories, and that gets you to the $2 billion figure. Not bad for a break-even business.