As promised, Medialoper team coverage of the 1 billionth iTune sold continues. Today, we look at the economics of the iTunes store. Conventional wisdom suggests that margins on the songs are so low that the real moneymaker for Apple in its iTunes experiment is the iPod.
That, of course, suggests that making money on volume is quaint concept. Apple is selling approximately three million songs a day, meaning the second billion will be reached much faster than the first billion. Unless things go horribly wrong, the third billion will be even faster. 83% of legally downloadable music is sold via the iTunes music store.
Let’s pause for a moment and ask the first obvious question: why in the world would anyone not be cutting a deal with Apple right now? Why would anyone be putting all their eggs in Microsoft’s basket? Yes, two questions. If you want to sell your music on the Internet, wouldn’t it be smart to go where the money is? You don’t have to be exclusive — make deals with everyone — but be smart.
Continuing. Analysts say that Apple only receives 25 – 30 cents per song. Wow! How many zeroes in a billion? If there are 9, then Apple will be netting $250 million per billion downloads. Now I’m not much for money management, but it seem to me that there’s a chance at profitability there. That money isn’t guaranteed, of course:
Although Apple enjoys a huge lead in digital music, the company is facing tough competitors such as Microsoft, Sony, Amazon and Google, which have either jumped into or are ready to get into the digital music market.
It is far more likely that sales of iPods will slow; you can only introduce so many new models before market saturation creeps in. Sure, computer sales will increase (have you ever visited an Apple store? Those places get crazy busy.). Right now, iTunes has the right product at the right price (remember, all you music executives, price matters to consumers). I’m betting that the introduction of downloadable video and increased consumer awareness of the iTunes store will lead to more zeroes piling on the profit side.