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“But the operating budget for the store is beginning to reach a level that may be beyond what can be spent reasonably. The amount left over for operations has increased from ~$30 million a month in 2009 to $75 million/month today” asymco writes. “In fact, if this burn rate is maintained (even though it’s increasing) the operating budget for iTunes is nearing $1 billion/yr.”
MacDailyNews Take: As long as the enterprise operates at or above break even, there is no reasonable limit to what can be spent on its operation.
asymco writes, “One implication of the economics involved is that a budget like this may provide a significant barrier to entry for any competitors looking to take on the iTunes juggernaut. iTunes has reached content critical mass (12 million songs), user base (160 million users) and wide distribution (23 countries for songs and 80+ countries for apps)… These are non-trivial operational issues that even the best in the “cloud” business models will find challenging.
This discussion excludes video sales, rentals, book sales as we don’t have solid histories for these product lines,” asymco writes. “iTunes Music Store content downloads have generated $16.4 billion in sales to date.”
Full article here.
MacDailyNews Take: Remember that these are best-guess estimates and not official Apple numbers. Read the full article to see how asymco arrived at his estimates.
Whatever the expense of running the iTunes Store, Apple clearly benefits from it financially (even if largely indirectly) by providing a content conduit for its products and an incentive to keep customers buying its electronic wares and staying within the Apple ecosystem. iTunes’ success and its large customer base also strengthen Apple’s bargaining clout with the content providers — music labels and movie studios. You can’t just look at the store as a normal e-business and say, “It costs X amount to operate and only brings in Y amount in revenue, therefore it’s a drain on resources.” Obviously, Apple would like to run it at a profit, and I would assume it is eking out a small profit on the store. But, even if this is not the case, Apple can continue to run iTunes as something of a loss-leader and reap great benefits from it. I imagine the ultimate goal is to position Apple a major player in digital content delivery to the home; the new Apple TV is clearly a step in that direction.
“One implication of the economics involved is that a budget like this may provide a significant barrier to entry for any competitors looking to take on the iTunes juggernaut.”
^^^ asymco gets it.
Of course, no one bats an eye when MS runs Xbox at a *loss* for years to build the platform in an effort to draw more developers.
Apple benefits by selling more hardware – iPods, iPhones, iPads, iMacs etc that offer access to the content. It could cost them 2 billion at some point, and as long as their hardware sales grow accordingly, iTunes as a marketplace for media will continue.
@Steve516,
And of course it positions them well for the day when the iTunes Store really takes off and starts making crazy money (the new APple TV will get them a lot closer to that).
Most large web ventures had to lose hundreds of millions or billions of dollars to reach profitability (and most never do get there).
Even the worst estimates say Apple got there with break-even financials the whole way.
Are they running this on XServes? If they are, might be a good time to highlight their industrial strength again. Those are huge numbers and I doubt anyone would want to run that many servers on PC based systems.
@Kevin Ledgister
I’ve wondered this as well. I would think Apple would be using their own products, but maybe not. Perhaps even Xserves aren’t good enough. It would be interesting to see though.
A budget like this will provide a prohibitive entry barrier to for some iTunes competitors, especially those that just don’t get it…Nokia are you listening yet?
Amazon has cheaper music and much wider book selection plus no DRM. Good luck finding books that are current popular best sellers on iTunes. They are not all there … had to go to Amazon to enjoy them on my iPad.
Amazon is a much more pleasant experience in my humble opinion … just sayin’
asymco gets it +1
any more, the blood on the click wheel is as much to do with this factor as anything else. Only god google has this much infrastructure to throw at something….but that is whole other discussion
The Apple ecosystem is bursting with profit, so I am not worried about the operational costs of the iTunes Store at this point. The profits from the hardware sales far outweigh these operational costs, and the two are symbiotic.
@BDD
Apple has DRM? Since when? And your point about Amazon’s music prices, while valid, is due only to the success of iTunes. Collusion of the labels, trying to limit Apple’s power, led to raising prices on iTunes while maintaining the $0.99 price on Amazon. It also led to that DRM (and the removal of it) of which you speak. Don’t blame Apple for cartel collusion. Your points are valid (though I disagree with Amazon being more pleasant), but you place blame in the wrong spot.
It must be “nice” for Apple to be able to run the entire iTunes Store operation as a “value-added service” for its hardware customers. Most current and potential competitors (such as Amazon) have to be in business to turn a profit, not “break even.”
Vertti, SEPTEMBER 9, 2010 at 6:02 PM
This is the luxury with the Apple that we can toss a billion here and billion there almost like Steve Jobs & Co. You can’t do that with Nokia
asymco, SEPTEMBER 9, 2010 at 6:06 PM
Fixed. What’s a billion among friends…
Priceless 😀
They run at break-even only if you use Hollywood accounting…