Apple losing money on songs?

[erockerboy]

So I was reading this article in the Washington Post about the death of the "traditional" record stores...

http://www.washingtonpost.com/wp-dyn/articles/A20620-2004Feb6.html

...and I came across the following sentence:

Likewise, at 99 cents per song, Apple is actually losing money on each track it sells. It earns the money back, and then some, by selling iPods, which start at $249.

The above is in the middle of page 2 of the article, in case anyone is fact-checking me on this.

At any rate -- has anyone got the dollar figures to back this up? I thought for sure Apple was turning a profit on the actual iTunes songs. If the songs are indeed merely a "loss leader" offered for the sole purpose of selling more iPods, ya gotta wonder... how long is that particular biz model sustainable?

Or are they planning on jacking the prices for iTunes downloads in the near future?

Anyone have the inside scoop on this???

 

[LethalWolfe]

It's been known for a while that Apple losses money/breaks even on song sales (Jobs has said it himself 3 or 4 times in interviews and such). And the business model is a proven one. Shaving razors, printers, heck even Macs. I'm sure Apple makes money on software but the margins can't be that big. Apples uses killer software at great prices to get people to buy their computers.


Lethal

 

[solvs]

I doubt Apple is actually losing money on each song sold. I'm sure the R&D/setup costs were pretty high, as is the bandwidth and the money the record companies take out of each song sold. But the initial cost is made up over time the more sold. Apple makes very little per song, but there must be some profit.

 

[LethalWolfe]

As I understand it the iTMS is designed to basically break even. The point of iTMS is to sell iPods not generate revenue on its own. In interviews Jobs has said as much. He's also questioned how the other music services will survive because there is little/no profit in downloadable music sales of this nature.


Lethal

 

[Dippo]

The only people that are making money off iTunes are the Record Companies. Apple and the artists probably aren't getting a penny. Well, maybe that's all their getting

 

[bousozoku]

Supposedly, there is about 33 cents on each 99 cent song that Apple gets. Once, they pay for bandwidth, server costs, advertising, etc. there is nothing left.

The iPod is the iTunes profit centre.

 

[laserbeahm]

I'm sure that they still make money on each song. All the articles that talked about how much money Apple makes on each song said most of the profit goes to the record companies. The iTunes profit margins are very low compared to that of other Apple products. I doubt however that they are losing money on each song they sell, especially if they are selling tens of millions of songs a year.

 

[MacAztec]

Originally posted by bousozoku
Supposedly, there is about 33 cents on each 99 cent song that Apple gets. Once, they pay for bandwidth, server costs, advertising, etc. there is nothing left.

The iPod is the iTunes profit centre.

I dont know...

.33 x 1,000,000 (fraction of what apple has sold) is 333,000$

So the setup cost was probly around 100,000 dollars (xServes, xRaid [3.5 TB Model, holds rougly 800,000 songs], contracts]

Then, they have to pay bandwidth monthly, and the adding songs fees, etc. They are selling over 1 million songs a month I believe, so that is 333,000 dollars just to keep it running.

I think they are making some cash.

 

[LethalWolfe]

Originally posted by MacAztec
I dont know...

.33 x 1,000,000 (fraction of what apple has sold) is 333,000$

So the setup cost was probly around 100,000 dollars (xServes, xRaid [3.5 TB Model, holds rougly 800,000 songs], contracts]

Then, they have to pay bandwidth monthly, and the adding songs fees, etc. They are selling over 1 million songs a month I believe, so that is 333,000 dollars just to keep it running.

I think they are making some cash.

Jobs has, in multiple interviews, stated that the iTMS is structured to break even. iTMS was not made to turn a worth while profit (if any profit at all). It's point is not to be a revenue stream but to entice<sp?> people to buy iPods. A product which Apple does make a nice profit on.


Lethal

 

[Chip NoVaMac]

They may not be making a profit yet, but with the Pepsi Caps and all the long-term prospects are good. Once they get a critical mass of consumers using ITMS, they can slowly start to raise prices to start making ITMS profitable.

 

[Stelliform]

Originally posted by MacAztec
I dont know...

So the setup cost was probly around 100,000 dollars (xServes, xRaid [3.5 TB Model, holds rougly 800,000 songs], contracts]

I think that the setup cost was probably alot higher. I have a client that is looking at a VOIP Phone system that is going to cost $150,000. So I think that 100,000 is super conservative....

 

[howard]

i wonder how much the credit card fee takes from there 33 cents...

i asume its better for them if you buy an album, also i bet gift certificates are good for them because of that too

 

[Chip NoVaMac]

Originally posted by howard
i wonder how much the credit card fee takes from there 33 cents...

i asume its better for them if you buy an album, also i bet gift certificates are good for them because of that too

Credit card fees vary by issuer and banks, but the run from 2-5%. Given Apple's size and other credit card business i would assume that they are in the 2-3% range.

 

[sparky76]

If Apple really were losing money on each song, they would not be promoting the ITMS the way they are - more sales would equal bigger losses. There is probably a very small margin on each song sold as profit. The way to make real money is not to raise prices but, when they have critical mass in the market, to renegotiate the deal they have with the record companies. Even an extra 2c per song would make a big difference if they are selling 10 million songs per month by then (within a very few years, at the current rate of growth).

 

[MongoTheGeek]

Originally posted by solvs
I doubt Apple is actually losing money on each song sold. I'm sure the R&D/setup costs were pretty high, as is the bandwidth and the money the record companies take out of each song sold. But the initial cost is made up over time the more sold. Apple makes very little per song, but there must be some profit.

Keep in mind there is loosing money on paper and there is loosing money in the bank. Apple goes and buys the servers from itself at retail(ka-ching) and takes that out of the markup claiming a loss on the songs. Then it takes some of its developers and has them develop related music products such as garageband and quicktime but since it goes to support the iTMS the money can come from there. Remember there was a quicktime update recently that was billed as a iTMS thing but did other things.

To misquote Mark Twain, "There are lies, damned lies and financial statements"

 

[Le Big Mac]

Originally posted by Chip NoVaMac
Credit card fees vary by issuer and banks, but the run from 2-5%. Given Apple's size and other credit card business i would assume that they are in the 2-3% range.

Although isn't there a minimum charge usually? Surely Apple negotiated around this, so they aren't paying $1 to process a 99c transaction.

 

[Chip NoVaMac]

Originally posted by Le Big Mac
Although isn't there a minimum charge usually? Surely Apple negotiated around this, so they aren't paying $1 to process a 99c transaction.

I'll have to ask our CFO when he returns from Vegas (no... there is a big show down there [not what some of you may be thinking]).

That does bring up something that I am not aware of since i haven't done any downloading with ITMS. Is there sales tax charged? If so, do we owe taxes on the Pepsi promo? If not that would take another 3-10% off their profits depending on where the sale came from. I would assume that they are different from some internet order sites since they have legal nexus in most if not all states.