In an article that talks about the various industries Apple is involved in (and comparing them to others if they were separate businesses), Asymco's Horace Dediu
points out that Apple's iTunes business -- all by itself -- is a monster corporation
. It has an estimated gross margin of around 15 percent, is steadily growing over 30 percent per year and may become Apple's third-largest "leg of the stool," passing the Mac business at some point this year.
Apple, with the Q1 report issued in January, changed
the way it reported revenue: it now combines software, all iTunes content and services into one category that Dediu refers to as the iTunes "leg" of Apple's business, separate from the iPhone, iPad, Mac and iPod "businesses." Software now includes not just Apple's Mac software and pro tools but iOS apps and system updates. The change means that each of the larger three categories (iPhone, iPad and Mac) now represent almost purely hardware sales, making it easier for analysts and investors to judge how well any particular category is actually doing.
Across 2012, the iTunes "business" had $13.5 billion in revenue and around $2 billion in likely profit (Apple doesn't disclose exact figures). This is more than twice as much as Apple makes from its iPod hardware sales. More interestingly, if the iTunes and Accessories revenues were combined into one "non-hardware" category and compared to any major phone manufacturer, only Samsung makes more money in revenues. Again, this does not include the revenue from any hardware portion of Apple's revenues; just the iTunes and Accessories "businesses."
Apple has been the largest seller of digital music as well as the most successful digital-video direct rent and sales
merchant for some time (Netflix, which streams its digital content rather than using direct sales or individual rentals, is not counted
in that definition). If the now-separated Accessories category (which includes the Apple TV and Smart Covers among other items) were included with the iTunes categories, the combination would be larger than even Apple's Mac business. Without the Accessories category, the iTunes "business" alone is expected to pass the Mac business sometime in 2013.
Dediu points out that the iTunes "business" is made up of a confederation of other businesses that use different models. Originally, the music portion of the iTunes store was run as a "break-even" business in order to foster both adoption and iPod sales. As the development of a full eco-system came to fruition, the iTunes store (now with other media and iOS app offerings) became the center axis of Apple's non-hardware business, completed with the addition of the Mac App Store in late 2010.
The music business continues to use a "wholesale revenue recognition" accounting while apps and e-books continue to use an "agency" revenue model with potentially higher margins, Dediu says, particularly in the software area. Apple's 30 percent "cut" of most non-free products offered through its iTunes stores now generate substantive profit (though not much by comparison with the significantly higher margins and sales of Apple's hardware divisions). The company also hosts a huge quantity of free material on its stores, beyond just the free apps one would find on other app stores -- free e-books, music, podcasts and iTunes U (the latter two areas no other Apple competitor offers as a part of its stores) among other no-cost offerings, using iTunes profits to subsidize the costs of hosting free content.
The combination and integration of the experience contributes substantially to Apple's greater loyalty factor, and play a substantial role in the iTunes category's steady, significant growth even as other areas ebb and flow (and for many phone maker competitors, simply ebb
). It has been previously noted that Apple's iTunes category alone
is more than $1 billion (in revenue) bigger than Microsoft's Entertainment and Devices (Xbox, Windows Phone) division, and its revenues are roughly equal to each of Microsoft's Windows or Business (which includes Office, Exchange and Sharepoint) divisions.