

iTunes now costs $1.3 billion/yr to run - shawndumas
http://www.asymco.com/2011/06/13/itunes-now-costs-1-3-billionyr-to-run/

======
zdw
So, is 30% too much of a cut when the platform offers:

\- Credit card processing

\- The largest marketplace with the most paying customers

\- Download hosting

\- Promotion

\- Highly available document and key/value store infrastructure

\- Keeping junk and malware out of the store, which maintains user trust.

I'd argue that, like most emotionally influence business decisions, Apple
sticking with the same percentage is a good thing - witness how the markets
vary when things are up in the air politically.

Keeping the same policies for a long time allows businesses to plan
appropriately as they know what they're going to get, even if it's not ideal.

~~~
Aloisius
Does anyone believe that the promotion that Apple offers on average is worth
two cents?

And what good is a marketplace with some of the worst discovery ever? I mean,
there are now hundreds of thousands of apps. Finding high quality apps on the
app store is like finding a needle in a Utah sized haystack.

I much rather do my own marketing, have a user download the app off my website
or heck, Amazon (which actually has a decent recommendation engine).

And keeping junk out? Have you seen most of the apps? I mean the number of
them that haven't been updated in years is staggering. The number that are
essentially clones churned out by some make-an-app framework is ridiculous.
The signal-to-noise ratio on the app store is awful.

Credit card processing? Not having to do anything is worth 4-5%.

~~~
xenophanes
> Does anyone believe that the promotion that Apple offers on average is worth
> two cents?

I do. I made a couple small and quick apps. They have made several hundred
dollars. I attribute that almost entirely to Apple's promotion of them, mostly
by having them show up in iTunes search results which Apple promotes. Also
having them show up as recent releases.

My promotion consisted of linking them on my websites. If that was all it was
-- my website links and nothing else -- I think sales would be near zero.

For better apps, Apple's promotion is even more valuable. Definitely no where
near 2 cents.

~~~
smackfu
Counting search results as promotion is a stretch.

~~~
ojilles
Not really as Apple made sure searches happen in the first place.

~~~
danilocampos
Not sure why you're being voted down. Distribution channels don't just spring
out of the ground overnight. Apple's promotion of iTunes and the App Store
created a critical mass of users willing and able to spend money, while Apple
maintains that by creating mechanisms to satisfy their demand for apps and
content.

~~~
Aloisius
Because if people are searching for a product, they probably already know
about it and it is hard to call that "promotion" unless you squint really hard
in which case, Google is offering free promotion to everyone!

~~~
danilocampos
"tally clicker"

"weight counter"

"hike mapper"

"vnc client"

People search for solutions to problems as often, or more than, specific apps.
Appearing in that lineup is an important opportunity.

------
chicagobob
Actually, what Tim Cook said at the Apple's Financial Conference last quarter
was that it runs "a little ahead of break even". Therefore, it is reasonable
to say it runs at break even.

Even if you are cynical and assume a certain amount of money is moved from one
department to another, he can't say something on the record like that, if it
isn't basically the truth (these numbers are audited and are subject to
Sarbanes–Oxley. So, even assuming a small amount of shifting money around
between departments and his fudge factor "a little", I think you could at most
say single digits, for example: 5% if you want (or whatever small % you
choose), it is still close enough for normal conversation to say its break
even.

~~~
borism
_these numbers are audited and are subject to Sarbanes–Oxley_

AFAIK only if they're large enough to make a dent in overall AAPL financial
picture.

------
Kylekramer
It is quite a leap to assume it runs break even. I know Apple's people like to
say it does, but numbers can be manipuated and I trust Apple is smart enough
to optimize over the years to give themselves a small but healthy profit.

~~~
ugh
Let's say 300 million? That would still mean that iTunes costs a billiom to
run for a year.

Saying that iTunes is run a bit over break even – which Apple did during their
conference calls – while making something like 300 million is very likely
illegal and not something Apple would do.

~~~
recoiledsnake
Yes,Apple is a white horse when it comes to financial and legal matters,
right?

~~~
ugh
I don't know, I have no evidence to claim that Apple routinely lies to
shareholders. That's why I don't.

I'm not particularly attached to that postion and willing to be convinced.

~~~
recoiledsnake
Judging by your posting history, I am not surprised.

[http://www.eetimes.com/electronics-news/4068357/Apple-
restat...](http://www.eetimes.com/electronics-news/4068357/Apple-restates-
acknowledges-faked-documents)

[http://www.betanews.com/article/SEC-Charges-Former-Apple-
Cou...](http://www.betanews.com/article/SEC-Charges-Former-Apple-Counsel-with-
Fraud-Former-CFO-Settles/1177440019)

[http://arstechnica.com/apple/news/2008/07/steve-jobs-and-
com...](http://arstechnica.com/apple/news/2008/07/steve-jobs-and-company-sued-
for-stock-fraud.ars)

From the wiki:

[http://en.wikipedia.org/wiki/Steve_Jobs#Stock_options_backda...](http://en.wikipedia.org/wiki/Steve_Jobs#Stock_options_backdating_issue)

Edit:

Thanks for the silent downvotes with no replies.

Here's the relevant quote from the first link:

In the filings, Apple (Cupertino, Calif.) acknowledged that the company faked
documentation to indicate that a grant of 7.5 million options to CEO Steve
Jobs was recorded at a special meeting of the board of directors on Oct. 19,
2001. Such a meeting, Apple said, did not occur.

~~~
chc
Those stories are all about one incident many years ago. Posting several
articles about the same thing doesn't turn it into a trend. And since that
scandal, Apple has been fastidious about obeying the letter of the law.
Sarbanes-Oxley is practically Apple's religion.

~~~
recoiledsnake
I was merely responding to the statement that 'illegal things are not
something Apple would do' that was stated in a matter-of-fact manner.

>And since that scandal, Apple has been fastidious about obeying the letter of
the law

And you would know this how? Just because there's nothing revealed right now
doesn't mean there is nothing that is going on and might be revealed later. Of
course this cuts both ways and I am certainly not implying that something
shady is going on, but I am just curious about the free pass given to Apple on
here on various things that other companies don't get.

------
Stormbringer
Okay... so if 70% of the take is 2.5 billion, that means the total amount
taken in is 3.57 billion and change.

So Apple gains 1.07 billion with their 30% cut and spends 1.30 billion?

In other words, Apple digs into their own pocket for 230 million dollars in
order to run it? And people still complain about Apple's 30% cut. Wow.

~~~
trotsky
From the article:

 _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._

Asymco's analysis always seems to have some completely unsupported claim at
the center of its logic, thrown in almost as an aside. The portion marked with
arrows is the questionable bit this time. While the numbers aren't broken out
directly in their market filings, it is both obvious from their behavior, and
support by quite a number of analysts that the App Store(s) return significant
operating profit to Apple.

Cook suggests they run the service "just a bit ahead of break even" which
would suggest that they're up instead of down, but even that presumably
dubiously includes a large swath of media buys that are arguably more
promotional for the ecosystem as a whole than simply getting iPhone users to
go buy an album or app today. There's a reason that they don't break it out:
pissing off their content partners.

Think about it. You don't fight tooth and nail for 30% on bringing content in
house (ebooks, etc.) if you're somehow only going to break even on it or
worse.

Just on the face of it, it's wildly improbable that you could spend over a
billion dollars operating ITMS.

~~~
Stormbringer

      Just on the face of it, it's wildly improbable that you could spend over a billion dollars operating ITMS.
    

Surely it isn't _that_ much of a stretch? I'd be surprised if the music
companies weren't taking a big chunk of that, and server/bandwidth costs the
lion's share of whatever scraps are left.

------
zitterbewegung
Even if it costs 1.3 billion to run a year Apple's profit from quarter to
quarter vastly dwarfs that. Sort of like how it used to cost microsoft to
create their xbox platform. I think it is worth it.

~~~
int3rnaut
As a gamer I was thinking about the exact same thing. When assessing this
model do you think it matters that Microsoft has a monopoly on Xbox games,
whereas Apple has a number of competitors in terms of App and Music services?

~~~
recoiledsnake
Who are the competitors to Apple for iOS apps and games? Android and
BlackBerry? On that metric,XBox has competitors in the form of PS3, Wii etc.
Apple does have a monopoly on iOS games and apps.

~~~
int3rnaut
I suppose that's true, I think I was looking at things with more of a lens
towards music.

~~~
leviathant
Anecdote: When I buy music, I either buy it from Amazon MP3 or direct from the
artist via Bandcamp.

------
jfruh
Can someone help a poor liberal arts major? I see "costs $1.3 billion to run"
and I think "Apple loses $1.3b a year on the iTunes store." But reading the
article and the constant Apple talk about breaking even makes me think that
what they're trying to get at is "the infrastructure for the store and
payments to artists and app creators costs $1.3b a year, but Apple's 30
percent cut of everything produces about $1.3b a year in revenue, so it all
works out," which is a very different proposition, yes?

~~~
cooldeal
Your first thought is wrong, because "costs" is very different from "takes a
loss of".

~~~
jfruh
Well, OK, but is my second thought right?

~~~
ugh
Apple's revenue is $1.3 billion and since they about break even their costs
are about $1.3 billion. Your second thought is consequently not in line with
how cost is usually defined. If you are using the usual definition of cost the
title of the submission is not misleading.

Price is what you charge your customers, cost is what you have to pay to make
the product, revenue is the number of sold products times the price, profit
(or loss) is revenue minus number of sold products times the cost.

------
smackfu
Too bad Apple doesn't break it down a bit:

iTunes music: must make money. There is no review process, the labels handle
everything, and the file sizes are tiny.

iBooks: Probably loses money, based on a gut feeling for how many people are
actually buying books on iBooks vs Amazon.

Mac App Store: Probably losing money at this point.

iOS App Store: Could be break even I suppose. Obviously lose money on free
apps, plus the review process can't be cheap.

~~~
rsynnott
I would have called music the least likely one to be making money, actually. A
common usage pattern is buying one or two songs in a sitting, at which point
transaction charges really become significant, and it has always seemed that
the record labels take the lion's share of the payment.

iTunes TV, on the other hand, is probably more profitable, due to higher unit
cost. Books almost _must_ be profitable, because they're in the same range as
Kindle books, and Amazon wouldn't be pushing ebooks (and thus damaging their
traditional book market) so hard if they couldn't make a profit on them.

~~~
smackfu
Good points. I assume Apple is paying very low transaction fees, but they
would have to be very low to make $1.29 transactions profitable.

~~~
zackattack
Have you ever noticed how they bulk bill you for all your transactions, a few
days after purchase?

------
briandoll
Also of note, according to the article they spend $2.5 B on developers (ops
likely included in that stat).

Another data point to illustrate that to effect total cost of ownership on a
given system, focusing on developer productivity can have a greater impact
than operational efficiencies.

------
zmmmmm
I think it's missing the point to even talk about the operational cost of
running the iTunes store. It's a strategic play equivalent to the setting up
of tollgates on rivers in medieval times. The one most consistent theme across
all of Apple's decisions is to not let go of a vice like control of access by
third parties to their platform. My personal belief is that they know the
future value of owning the tollgate that everyone must pass through to get
digital products and information to consumers is far greater than even their
hardware business is today. It may not manifest in raw numbers directly (yet)
but in terms of the position of power it puts them in its value is
incalculable.

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guelo
iTunes store is an integral part of iDevices, they couldn't sell the things
without it. They're trying to separate out the cost to try to justify their
fees but it doesn't make any sense because it should be built into the price
of the devices. Before the app store existed Apple still provided the iTunes
store service to customers for free with the purchase of the device.

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supercanuck
At risk of sounding like a broken record, would it help to know that
Apple/iTunes runs SAP?

~~~
glhaynes
Why would it?

~~~
jfoutz
I had to look at supercanuck's comment history.

I think he's saying SAP is fantastically expensive and doesn't really optimize
the business enough to pay for itself.

------
patrickgzill
It is part of their (Apple's) ecosystem, so it really is just sales and
general admin. expenses at this point.

