More on Apple’s Billions: This Time, It’s iTunes

Billions and billions. It’s a theme that has accompanied me all week. In fact, I imagine I know a little how Carl Sagan must have felt. After writing about Apple’s (s aapl) billions just a few days ago, here I am again — but this time it’s not data centers and custom silicon — it’s music.

We reported here back in early February that Apple was running its 10 Billion Song Countdown Contest. Yesterday afternoon, as Steve Jobs was (probably not) blowing out the fifty five candles on his birthday cake, the odometer stopped when, according to The Loop, Louie Sulcer of Woodstock, Georgia, downloaded Guess Things Happen That Way by Johnny Cash.

The download likely earned Johnny Cash the usual pittance in royalties, while Sulcer became the lucky recipient of a $10,000 iTunes Gift Card from Apple.

Naturally, I’m insanely jealous.


Apple is understandably keen to celebrate the milestone. The iTunes Store first opened for business in April 2003 with a little over 200,000 items available for sale. Almost seven years later, the iTunes Store boasts more than 12 million songs, 55,000 TV episodes and 8,500 movies. In April 2008, it ranked as the number one (legal) online music seller in the United States.

10 billion songs in seven years is really something — in fact, my calculator tells me it’s a touch more than one song downloaded every second of every minute, day and night, since the store was launched. People with better math skills than me can (and most certainly will) take great pleasure correcting me in the comments below. The point is, my clumsy calculations notwithstanding, the iTunes Store is big business. In fact, it must be a big, fat, cash cow for Apple, right?

True Purpose

Well, as it happens, no, it’s not a big, fat, cash cow. It’s more like a well-fed, contented heifer. It certainly makes a good deal of money; according to one analyst it generated revenue of $520 million in the last quarter alone.

However, Apple’s CFO Peter Oppenheimer told analysts during an earnings call last month that the store wasn’t “a real money maker.” Our own Darrell Etherington wrote here about declining music sales which have undoubtedly had an affect on Apple’s earnings recently. And as far back as May last year I wrote about the problem of variable pricing in the iTunes Store. Only a few weeks ago Warner Music Group announced the news (already completely obvious to everyone except music industry executives) that iTunes music sales had slowed since higher prices were introduced. (Honestly, when will the old-school music industry just shut up and admit defeat?)

So the iTunes Store might be pushing huge numbers in digital downloads (10 billion songs, three billion apps and counting) but the revenue it generates is decidedly small-frys. So why run it?

Well, it’s not a loss-maker by any means, and besides, Apple claims profit isn’t the purpose for the iTunes Store. Oppenheimer said during his earnings call:

Regarding the App Store and the iTunes stores, we are running those a bit over break even and that hasn’t changed. We are very excited to be providing our developers with a fabulous opportunity and we think that is helping us a lot with the iPhone and the iPod touch platform.

As far as Apple is concerned, the iTunes Store exists as a mechanism for selling its hardware. iPods enjoy seamless integration with iTunes. As a relatively inexpensive software publishing and delivery platform for iPhones and iPod touches, third-party app developers (almost) couldn’t ask for more.

Defense Tactic

The whole “a bit over break even” business is probably preferable over a service that is wildly profitable. Think about it; Apple’s super-success with the iPod, the iPhone & iPod touch and, presumably, with the upcoming iPad, translates into an awful lot of people around the world using iTunes (and the iTunes Store) all the time, every single day. My own clunky math above tells me this already happens, but we’re talking about this intense activity steadily increasing as the iPhone continues to dominate and the iPad begins to make waves.

As Apple’s hardware sales soar, and as more and more of its hardware ships with, or depends upon, iTunes software and services in some shape or form, the bitter cries of “anti-competitive” and “monopoly” from major competitors will grow louder.

That the iTunes Store is not a means to print its own money gives Apple the ability to play its “But It’s Not Very Profitable For Us” card when the threat of antitrust inquiries looms (and oh boy will it loom). It might not be strong enough a defense to save it from unsavory intervention by the law courts (particularly those in Europe, which can’t help but interfere with successful businesses) but it certainly can’t do it any harm.

It’s ironic, really; when the iTunes Store launched it was lambasted by critics certain it had no chance at success. Of course, those criticisms have since proved unfounded, yet today it seems Apple is in an awkward place, and paying a price for its success.