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back to article Apple: iPhone App and iTunes stores don't make money

Apple's App Store and iTunes Store aren't moneymakers. They're lures for prospective handset customers. Although Apple's online content and app marts have long been suspected of being more marketing arms than profit centers, CFO Peter Oppenheimer made that belief a certainty on Monday afternoon when speaking with analysts and …

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Sounds like they're doing it wrong

So it's a business that doesn't have to hold any inventory, where the delivery costs are minimal, that has a direct channel through to all it's highly locked-in customers and doesn't have to worry about clients not paying. For an operation like that to NOT make money must be quite hard. Especially when, a lot of the time, they simply act as a middleman between the _real_ talent of the app. developers and the punters - just taking their rather high percentage off the top.

From the standpoint of a casual observer that looks a lot like eBay, though maybe without the same volume of trade - but with a much greater rake. So if eBay can make the odd $billion or 10 from online sales of other people's stuff it seems odd that shiny old Apple can't do the same. Maybe they just aren't very good at it.

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Stop

Are the delivery costs minimal?

Amazon has a surcharge on data costs, where Apple has none.

Sure, Kindle doesn't sport unlimited data contracts, but then Apps are generally rather more hefty than e-books, and they have tons more traffic. They also don't make anything from free downloads, which undoubtedly outnumber the number of paid apps, and again have no defined size limit - apps the size of Myth, at the price-point, wouldn't be possible on Kindle with the current data surcharge (Amazon have a cap on download size anyway, so that's partly moot).

I'm sure Apple are happy to exaggerate, but your argument needs some basis in truth, and evidence, rather than your own heresay.

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Got to agree with Pete 2

My jaw dropped when I read this story. In the real world SMB's make money but this lot cannot?

Anyway, if it's true, then anyone else with an App Store just might as well give up rather than run it as a charity shop!

Oh, hang on, those do make money!

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Anonymous Coward

What are the costs?

The App Store has massive revenue - that much is documented.

So I guess they must have massive costs as well. Only two things I can think of.

(a) Their manual approval process is incredibly expensive. I guess I could believe this, but just another reason to get rid of it. If we equate the 30% fee with the cost of censorship then it becomes quite ironic: they are charging us directly for the cost of censoring our content and preventing any competitors from getting to us.

(b) They all sorts of other, only slightly related, things as App Store expenses in any effort to bring down the App Store income. Perhaps for tax or for P.R. reasons.

It would be good to see the numbers in more detail.

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Does it even matter though?

They didn't say they're making *no* money, just not a lot. What's a lot to Apple?

I'm sure they could make more by reducing the developer share and adding surcharges, but then would be be such a run-away success story?

It's kind of besides the point whether you believe them or not; whatever their reason, their strategy, it's clearly paying off because their profits are rising.

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say what ?

"I'm sure Apple are happy to exaggerate, but your argument needs some basis in truth, and evidence, rather than your own heresay."

Interesting neologism - heresay - sort of a cross between heresy and hearsay, I like it, of course it only works with the written word, not conversation.

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Jobs Halo

einstein....

correct. the itunes store has never been about making money. it's about tieing folks into a service that hooks up to hardware. yep, the 30+% profit margin is on hardware.

think halo effect. you buy tunes/apps which leads to ipods which leads to macs. that's where the money is. that is apples business strategy, always has been since the first ipod came out.

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J 3
Pirate

Hm...

That makes me evil then, for letting his Steviness down. I only bought an iPod (which is very good) and stopped at that... Better than stopping at the iTunes (which I've never used) phase, though.

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Jobs Horns

Now tell me Apple arn't evil.

Realy, this stinks of abusing market share. Effectivly running iTunes as a loss leader to hook people in.

And people say they are better than MS...

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jai
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loss leader

funny, but in my dictionary, "a little above breaking even" isn't in the definition of "loss leader"

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Anonymous Coward

completely agree ..

Its running at a profit, so its making more money than it costs to run, not even slightly a loss-leader, simples!

At $50 billion in annual revenue and a gross margin of 40%, I think running a service at or just above operational cost is a great idea and other companies could learn from this in how to build an ecosystem which not only helps you build market share but also helps sell other peoples stuff.

I'd like to see eBay/PayPal do this as they are the real ripoff merchants with their complex charges (PayPal now con us for cross-currency conversions by default). Shades of Intel and Microsoft market abusing practices.

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WTF?

How can it be a "loss leader"

..if it makes a profit?

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Paris Hilton

@Paul 4 And....

...Gillette don't flog their razors inexpensively to tie people in to the expensive blade cartridges?

Supermarkets don't have loss leaders to attract customers?

Pubs don't offer good value meals to increase wet sales?

Printer mfrs don't offer cheap inkjet printers but expensive ink cartridges?

Sheer sophistry to explain an anti-Apple rant.

That's giving you the benefit of the doubt - it COULD just be sheer stupidity resulting in a complete lack of understanding of a) How commerce, industry & this planet work and b) a failure to realise what is in fact wicked and what ain't.

I use iTunes fairly frequently - and I don't have an iPod nor do I have an iPhone. No-one forces me to do either.

Paris 'cos you gotta be blonde....

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Last time I looked

They don't dominate the market the same way Apple do.

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really?

So Apple with their market share of a few percent of phones, ipods & computers dominate their market more than the supermarkets dominate theirs? Really?

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iTunes profit

If Apple made money on iTunes the studios would demand more money until they didn't.

iTunes only works because Apple don't have to make money from it. They make the money on the iPods (and the studios think they should get a cut of that too).

Without the iPod it would just be another Spotify trying to figure out a way to pay the studios what they want and make money. Maybe Spotify want to get bought out like Napster who also could not make money.

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In other news

…Pope is a catholic and bears defecate in wooded areas.

Seriously though, there has been quite a bit of analysis in the past, which has been quite convincing, that the real way the ITS makes money is indirectly (i.e. the way that’s been suggested here). It would have been nice is some examples were cited – after all, the article does say this has been previously “suspected” and contains links about the app approval process (thinking about it, these aren’t overly relevant to the story)

Also what is “running those [App Store and the iTunes Store] a bit over break-even” exactly. Oppenheimer and I may share very different opinions about what ‘a bit even’ – not that my opinion matters… Personally, I’m a little sceptical – partly because I don’t trust businessmen and partly because I’m suspicious that Apple takes such a nice slice of iTunes revenue and still barely makes its money back.

I appreciate the ‘fanbois’ comment was meant to get the blood boiling of err… fanboys, who would hopefully comment, but not everyone who uses the iTunes Stores would be using a Mac. Similarly, there’s been an awful lot of coverage about very significant amount of iPhones have been jailbroken. There're an awful lot of users that haven't been hooked.

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Anonymous Coward

Oh...

...so Apple don't reject apps that might make their shitty devices look bad.

"Look, I only put a popup on that said 'Not enough available memory, please close Safari'"

"WE CANNOT LET PEOPLE KNOW THEY RAN OUT OF MEMORY! WE'LL LOOK STUPID!"

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Just One Question...

OK, so there isn't enough memory for your app to run, and you create a pop up with a helpful message. Just one question:

Where in RAM is the OS going to allocate space for the dialog box and message? You know, because a dialog box is a separate entity from the main window and in not drawn directly into the screen buffer...

If you're out of RAM, there are very few things you can do except release existing memory. Maybe that's why your app was rejected.

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Re: Just One Question

First up, you don't need to actually run out of memory to know that you are going to run out. If you know that you have a ten megabyte requirement and you can only see five, then that's plenty to show a message box.

Second up, any sane GUI will have some reserved space, accessible to the message box API, precisely for this situation. Even DOS-based Windows managed this one.

Disclaimer: I've no idea what the app in question was wanting to do (reasonably or otherwise) or what it actually was doing (ditto). I'm merely pointing out that there are perfectly reasonable answers to those questions. Running out of memory is not some new problem to which computer scientists and OS designers have not yet given any thought.

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FAIL

Lern too spel

Is Commadore the hilarious new way of spelling Commodore? If so, can I please be put back in the memo loop so I don't get confused again.

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90%

That's a classic bit of spin. Still means 1 in 10 apps are not approved withing 14 days. But of course 1 in 10 sounds a lot worse than 90%.

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true but

True, but if you work with a publisher - let's say EA or Ubisoft - your chances of getting approvals are a lot slimmer than on App Store.

Of course, EA and Ubisoft will explain in great detail what the problems are, but then they have a financial interest in getting the product to market (where Apple, apparently, don't).

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Wow.....

He said new products. With an 's'. Theres going to be more than one !!!!! I cant wait? What else will there be? Obviously weve all worked out the ITablet/Slate/Pad one.

I reckon the other on will be a bit like a ferrari, but with a 40 inch touch screen. It will read your thoughts and know what colour you want it to be. And it will be a bit shiny, but with breasts. And some fur. And it will run OSX and Windows and Ubuntu. And, and and and...... And it will like me. Even when everone else thinks they might have turned of my life support. And it will make toast.

Go Apple !!!!!

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Happy

toast?

I'm sold.

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re: Wow....

Well, there have been rumours that there might be more than one type of hardware.

However, there are also rumours - which I think make sense - that there will be a new iWorks (with multi-touch capability) and new iPhone OS unveiled.

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iLife '10

It's in the title

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Toast

Will it burn photos onto your toast? Or weather forecasts for the day maybe? If you want dark toast can you download new settings from iTunes?

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anti trust

Even if they could make profit on the app / itunes store, it isn't in apple's interest to do so. with their high market share in players and smart phones, having lockin on how users get content (particularly on the iphone and Jesus tablet) starts to smack of anti-trust issues. Its a great defense "we may totally control the eco-system your m'lud, but since we don't make any cash from it we are just doing it for the just for good of our users. How can that be anti-competitive?"

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I was wondering aobut that...

I mean are they actually allowed (legally) to do this (restrict sales on the iphone platform)?

or is it one of those issues that no-one knows the answer to because it has never gone before a court?

Having software approval from the hardware / OS vendor might be good in some respects (e.g. less buggy code) but if they get all their bugs sorted, how will anyone sell version 2.0?

It also raises the issue that if for some reason you annoy the powers that be, then you are in serious trouble.

Speaking of which, is The Register covering the press launch tomorrow..?

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Anonymous Coward

Anti-trust.

That's not how it works. How much money you make is irrelevant. In fact one could argue that the price of entry to the market is fixed at such a low level that profit cannot be made by anyone else. It's also unlawful to use one market to achieve dominance in another, however this is much harded to prove (unless you blatantly go out of your way to put the only other competitor out of business, for instance like what happened to Netscape) Therefore the dominant firm are stifling competition by 'price-fixing'. Besides, you cannot punish a business for having the lions share of a niche (approximately 1 in 4 sales of music is digital. Source: IFPI), the market must be viewed as a whole. Apple may have a dominant position in downloads, but when applied to the whole it's much smaller. This is the very reason Apple couldn't be sued for their perceived monopoly over Macintosh computers and why ultimately Psystar were on a hiding to nothing.

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Ted
Boffin

Apple has nothing close to a monopoly.

Just a correction for you and everyone that somehow thinks Apple has some kind of "monopoly".

There can't be antitrust or monopoly issues when you only control 4% of the cell phone market. Customers are happy to go elsewhere if they don't like the consistency and ease of use of Apple products. Even with the iPod at around 70% share of "mp3 players", it's nowhere close to a monopoly since there are plenty of other ways to obtain and listen to "music" in that "market"...

Apple is vertically integrated... and that's perfectly legal since you can't have a "monopoly" on your own products.

So will people please pass on the fact that Apple is nowhere close to any monopoly position. If you don't like the iPhone, then you have 100's of other choices. ONLY if Apple had around 80% of ALL cell phones would antitrust become an issue. But with 4% or (technically less) they are far, far, far away from any "monopoly" position.

Now you know!

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@Ted 16:41

Well done!

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It will make money

I don't believe the major costs of running the app store are related to the review process I would guess this takes maybe 200 staff. Adding up their salaries is a drop in the ocean for the amount spent on the app store.

I would think the major cost is hardware, as iTunes has become more popular and offered a wider variety of media they have needed more and more hardware to run it. As with most businesses they will have a continual hardware replacement programme. This I would think would lead to an increase in profitability overtime as hardware becomes more efficient.

Also since there is no reason for apple to comment on the profit it makes individually from iTunes a small profit in reality could be a lot.

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App sales

Just a thought, of these over 100,000 apps on the store, how many of them are being sold for the grand price of "Free". Yes, I appreciate that you have to buy either your iPod touch or iPhone first, but of my 9 nearly full screens on my iPhone, not a single App has had a price tag attached to it, not because I'm some kind of a 'freetard' but because I am yet to find anything that looks like it will be soooo unbelievably useful that I am willing to part with some of my hard earned cash to acquire it.

Similarly, I have only brought 3 items from the music store, (and this was only due to receiving iTunes vouchers for Christmas), and that is because, I still prefer to buy a CD when I get my music.

I may or may not be an average Apple customer, but using my purchasing habits as a rough guide, I can certainly believe that their store is "running .. a bit over break-even"

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free apps

each of the developers of free apps has paid Apple $100 to be able to list things on the app store (that $100 also lets you run your own apps on hardware rather than just on the simulator)

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I'm sold too!

This is reassuring since Android has been hit with Malware already, I don't need to worry as much with the Apple iPhone or suspected the iSlate.

Some people (developers and geeks) might get annoyed by it, but in the long run it will pay off. Checks will become faster, apps should become slicker and security for the end-user tightened.

I'm getting tired of small hiccups and GUI issues in Windows 7 too, starting to piss me off, no debating a MacPro Desktop, I'll miss gaming slightly though. :(

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Jobs Halo

When will Apple learn

The whole app approval process is an absolute disgrace, it clearly cheats developers and consumers alike. Market forces have spoken, sales of Apple hardware have plummeted, while nearly all developers have abandoned the app store, savouring the freedom offered by Ovi and Windows Mobile.

Or have I got mixed up?

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Jobs Horns

When will Apple learn

When the fooking iDiots stop buying locked in crap that that Apple churn out.

Viva Cyanogen!!

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Ted
Boffin

Yes, you are mixed up.

Only a tiny fraction of Apps aren't approved, it's far less than 1%... yes, some developers need to do more work before they are allowed on the App Store, which is good for customers and reliablity. So Apple isn't doing it out of spite, but for the good of everyone.

Ah, market forces have spoken and Mac, iPhone sales are off the charts... Mac sales were up 30% from last year at this time, iPhone sales were up 100%, so there is no "plummeting".

Yes, Ovi and Windows Mobile Store have failed, so they are considering getting out of the market, they just can't compete with a high quality product like the iPhone and App Store.

The Tablet comes out tomorrow which will be the first successful tablet in the market, so it's only going to get worse for competitors since they continue to fail at providing a quality device.

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J 3
FAIL

@Ted

You, sir, just suffered a sarcasm detection failure, I suspect.

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FAIL

@Ted: Fanboy Fail

Suggest upgrade to sarcasm detector

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Correctamundo

@ J 3 & blackworx

My powers of sarcasm have failed me.

Sent from my Ovi phone (yeah, fucking right).

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what is better ......

making a small profit - just above break even - on millions of sales, downloads or whatever, or a larger profit - say 30% - on fewer sales?

Regardless of the product I'd say Apple have the right mix. Large profit on the items most people will buy one of, and small profit on each of the millions of sales to "feed" the devices bought.

How many itunes sales have there been at "just above break even"? Oh yes that's right, hundreds of MILLIONS! How many ipods/iphones/iwhatevers? rather less!

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Jobs Halo

Apple COO implies MULTIPLE product launches.

QUOTE

More than one analyst asked both Oppenheimer and Cook whether Apple's projections for the next quarter's revenue took into account the launch of the long-rumored iPad, but both execs dodged all such questions. To one questioner, Cook replied: "I wouldn't want to take away your joy and surprise on Wednesday when you see our latest creations."

ENDQUOTE

I note particularly the very last word "creations". It is plural.

This would imply MORE THAN ONE product launches at today's Apple event. Or it could imply multiple content product streams to be announced to provide all the edu-newso-video-textotainment which all those customers for the shiny new tablet are going to require. Or it could just be a little slip of the tongue.

From an investing and trading perspective, Plural is IMHO better than Singular. It implies multiple revenue streams, spreading of risk and further profitable leverage of the existing 'ecosystem' which pipelines cash direct from 100 million consumers' credit cards to Cupertino.

Thinking of how it could play out on stage, all the best Apple events in the past have featured at least a short section of "here's some of our old stuff we've updated" (eg an annual update of iLife or iWorks, a midlife revamp one of the iPod, Portable or Desktop product lines). These little 'appetisers' serve to set up Steve Jobs famous "one more thing" moments, when he pulls the big news product from his pocket to hysterical acclaim.

From a purely trading perspective today, one would expect a generally Bullish stance to hold until at least the moment SJ produces the tablet. There could then be an outbreak of 'selling on the news'. The key question, of course, is when will traders hit the button to make that switch. Or will the event + product + content combo be so powerful that a sell-off does not happen.

The answer is "we shall see".

FWOW, if there were to be a second physical product announced today, I would bet that an Apple-branded HD TV with 'built-in-everything' would be positively received by Wall Street as a supporting act to the Tablet.

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