> The reality is that Apple makes money because Apple sells hardware: they make more money on a single iPhone than they could ever hope to win back in a lifetime of application sales, and most users purchase a new iPhone every two years. You'd have to buy hundreds of $1-$2 apps every year for Apple to care about that business.
Is this true? I was under the impression that Apple makes the majority of their iOS money from royalties on the app store. What on earth could their expenses be to offset 30% of $1,000,000,000/quarter[1]?
If we look at Apple's 10-Q for Q1 2014, we see ~$40b in revenue for iOS devices, and ~$10b in revenue for "iTunes, Software and Services", which "includes revenue from sales on the iTunes Store, the App Store, the Mac App Store, and the iBooks Store, and revenue from sales of AppleCare, licensing and other services".
Conservative high estimates of their profit margin on iTunes sales is 10% (often the more reasonable estimates are "low single digits"), the low-end estimates I've seen for hardware sales is 40% (you can find people who have done detailed charts, breaking down the parts and labor for building these devices).
While Apple has said little historically about individual product profitability, the patent lawsuit between the company and Samsung provided one small window into just how valuable the iPhone franchise has been. In just 18 months between October 2010 and March 2012, gross margins on iPhone were between 49 and 58%, an almost unheard of figure for a consumer electronics product.
That's $16b profit on hardware, and $1b profit for all of iTunes (which analysts have claimed is likely similar for all of their various subdivisions); which, even if we took the crazy conservative assumption that that money is almost entirely revenue from the iTunes App Store, is only ~5% of their income.
But, as I bet is true for most of the people you know, I spend way more money on movies and music than I do on apps. Sure, there are "whales" who buy tons of in-app purchases, but "whales" for music are also common, and the cost of a single season of a television show is a massive investment.
Many (not all, maybe not even most, but many) of the people I know also purchase AppleCare, which is $100 per device and allocated to the same revenue bucket. I think this also includes AppleCare for MacBooks, which is $250. The percentage is thereby certainly much much lower than 5%.
You can also look at this in the other direction: the iPhone costs ~$600 (you don't pay all of this to Apple, though, it being subsidized through payments to your carrier), with the income estimates being ~$250. To make Apple as much money as they make on a single iPhone sale you would have to buy 2,500 $1 apps ;P.
At that point, Peter Oppenheimer added, “We run the App Store just a little over breakeven,” implicitly making the case that the App Store was not a big profit generator for the company.
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.). It implies over $1.3 billion per year.
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.
(One thing to note is that the amount of money they make off this division has changed over time, and people are now sometimes reporting the division to be profitable and no longer mostly be running "break even". However, these reports cite the reason being that Apple's margins on first-party software has increased and is in the same pile.)
For this reason, management has begun since 2010 to suggest that at least the App Store is run “a little over break-even”. How little is a good question. A one percent operating margin (from gross revenues) would imply as much as $45 million margin. I estimate 2% is possible on Apps and 1% on Music.
My estimate is that Apple’s own software generated $3.6 billion in Revenues in 2012. As you can imagine, this is a high margin business which grows at nearly 20%/yr. Although I estimate that the software business has been overtaken by the Apps and Music businesses in gross revenues, it keeps an operating margin similar to that of Microsoft or about 50%.
This means that iTunes inclusive of Apple’s own Software generates as much as 15% operating margin on gross revenues. That’s over $2 billion a year.
Is this true? I was under the impression that Apple makes the majority of their iOS money from royalties on the app store. What on earth could their expenses be to offset 30% of $1,000,000,000/quarter[1]?
1. http://www.forbes.com/sites/chuckjones/2014/01/07/apples-app...