“Since we know something about the average price of songs and apps, and we know the split between developers and Apple (and roughly between music labels and Apple) we can get a rough estimate of the amount Apple retains to run its store,” Horace Dediu writes for asymco.
“If we add the content margins from music and apps and assume the store runs at break even we can get an idea of what it costs to operate the store. The latest number is $113 million per month (from a total income of $313 million/mo.),” Dediu writes. “It implies over $1.3 billion per year.”
Dediu writes, “Much of that cost does go into serving the content (traffic and payment processing). Some of it goes to curation and support. But it’s very likely that there is much left over to be invested in capacity increases.”
Read more in the full article, which includes the usual excellent charts, here.
[Thanks to MacDailyNews Readers “Sarah” and “Lava_Head_UK” for the heads up.]
All of this assumes a ‘break-even basis” but why make that assumption?
In the digital world, costs don’t scale up the way they do in the physical world. A physical music store has to buy 1000 Beatles CDs in order to sell 1000 Beatles CDs, and the profit per CD remains the same regardless of the sales volume. Same in digital-land? No–revenue scales at a faster rate than the cost of delivery.
Apple’s been running this store for years, knows what they’re doing, and I’d assume they’ve figured out how to make it profitable. I know Tim Cook says that they run “a bit above break-even” but if a “bit” were 15%, that’s still a lot of profit.
Let’s do the math. It costs Apple $1.3 billion to run the iTunes store. Assuming that this figure is correct within a ballpark of 20% and halving it just the the sake of it and extending that cost across to Google for operating the Android Market Place, then it costs Google $650 million a year to run the place. Let’s say that Google wants to scale up to the level of Apple to accommodate all the millions of Droids, reputedly in numbers greater than iOS, Google will face a cost approximating to $1 billion a year in the near future. Aggregating the cost of R&D, marketing and paying the salaries of the Android development group should add another $1 billion to the Market Place operating cost.
Effectively giving away Android for free costs Google $2 billion a year. My question is how long can this free – getting ripped in the ass model – perpetuate? Plus all the patent infringement cases and IP violation cases that are outstanding against Google I’m not sure if Android amounts to more than a Larry Page vanity project.
Since Microsoft pissed away $8 billion developing XBox and Google is the new Microsoft I see how they’re copying Baldy’s strategy to a T. I like their strategy, I like it a lot.