Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Apple Inc.'s Growing iTunes Revenue Isn't As Impressive As It Seems

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Apple's (NASDAQ: AAPL  ) iTunes revenue just keeps growing. As Asymco points out, Apple's iTunes Group is now grossing about $7 billion per quarter, and growing at a rapid pace. Traditionally, Apple maintained that it ran iTunes near breakeven, but as the number of iOS devices in existence has increased, iTunes has become quite profitable. Perhaps that's why Google (NASDAQ: GOOGL  ) has increasingly emphasized its rival Google Play offering.

Still, I don't think it's impressive as it seems. In fact, although total iTunes revenue is growing, there's a number of trends in the composition of that revenue that is actually quite disturbing, suggesting that Apple's control of the mobile market might not be as guaranteed as previously assumed.

David Einhorn on why he owns Apple
In theory, iTunes is Apple's secret sauce. It's why this time is different, and why Apple will not be the next Nokia or BlackBerry -- two once-dominant smartphone makers rendered irrelevant by Apple's rise.

"People look at Apple and ask, 'Is it the next Motorola or BlackBerry?" hedge fund manager David Einhorn told CNBC (via AllThingsD) last year. "Apple's a bit different from those companies, because the ecosystem component [drives] recurring sale[s]."

Indeed, he's right to a large extent. If you've bought a lot of music from iTunes, books from iBooks, and apps from the App Store, then you're likely to stick with Apple when it comes time to buy a new smartphone. You could switch to a rival device running Google's Android, but you'd lose access to the all the content you purchased on iTunes -- a strong incentive not to switch.

That's something those other companies never had. In that context, the growth of iTunes revenue should be seen as truly encouraging -- the more money that gets spent on iTunes, the less likely Apple is to lose customers to Google.

Not all iTunes revenue is the same
But that's not really the case. Most of the growth, in terms of Apple's iTunes revenue, is coming from apps -- up more than 100% last year. In fact, music downloads and books actually fell on a yearly basis. That's fine, you might say -- if customers are buying a lot of apps, that's still content they don't want to risk losing migrating over to Google's platform.

Except they're not really buying many apps -- according to research firm Gartner, 65% of what constitutes mobile app revenue is coming from games, and most of those games are free titles supported with in-app purchases.

Someone who spends $100 on extra lives playing Candy Crush is, from Apple's perspective, much different from someone who drops $100 on iTunes music. The former is no more loyal to Apple's platform than any other user, while the later might stick to the iPhone, lest he lose his 100 song collection.

iTunes as a profit driver
It's difficult to judge how much money Apple brings in from iTunes. The company has never been forthright with the information, leading analysts to speculate. Last year, Horace Dediu pegged Apple's iTunes income at about $2 billion for 2012 -- a number that's no doubt increased significantly. But relative to Apple's other operations, it's hardly important -- Apple earned $13.1 billion last quarter alone.

That isn't to say iTunes has no value-- it remains an integral part of Apple's business model. iTunes purchases are what keeps Apple's customers coming back, preventing them from switching to Google's Android.

In that context, the recent growth of Apple's iTunes revenue really isn't that impressive -- freemium games don't result in repeat buyers.

A better investment than Apple? Get our top stock pick for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (10) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2014, at 1:07 PM, jdmeck wrote:

    I knew it had to be you as soon as I read the title. Always negative when it comes to Apple.

  • Report this Comment On February 15, 2014, at 1:31 PM, bsimpsen wrote:

    There's nothing about owning iTunes purchased music that ties anyone to Apple. AAC files are AAC files, and can be played by Android devices quite nicely.

    Movies are a different story, but it appears those are mostly rentals, which don't lock anyone in either.

    I think you may need another explanation for Apple's customer retention.

  • Report this Comment On February 15, 2014, at 1:46 PM, WineHouse wrote:

    You can have an iTunes account and iTunes on any computer, not just a Mac. People who are 100% PC and/or Android are still paying Apple for their iTunes purchases. So "bsimpson" is 100% correct.

  • Report this Comment On February 15, 2014, at 2:36 PM, deasystems wrote:

    Wow—you really stretch, don't you, Sam? Things must be getting close to the breaking point…

  • Report this Comment On February 15, 2014, at 5:03 PM, Caligula wrote:

    That's funny. You're correct that the iTunes store is a loyalty anchor, you're incorrect in assuming that Apple needs the income per se from content delivery as much as it needs the expose people to the Apple experience of hassle free updates, nice customer service, and helpful staff and their sales locations, another loss leader than ended up earning them a billion more here or there that they "didn't need".

  • Report this Comment On February 15, 2014, at 5:17 PM, Mathman6577 wrote:

    I don't think iTunes keep customers from switching to Android phones. The retention of > 90% (Android is < 75%) is probably due to the fact that Apple makes a better product overall.

  • Report this Comment On February 16, 2014, at 8:00 AM, candrsn1973 wrote:

    You've made some bad assumptions in this article. For one, who cares about the dollar figure of revenue for iTunes. Without iTunes and the apps and content offered therein, customers would have left the Apple ecosystem long ago.

    What's more, apps on iOS devices, more so than for any other platform these days, are exactly what keep users engaged with their devices and keep them coming back for more. No, it's not about the freemium games, but it is about the enterprise and content creation apps, ironically enough!

  • Report this Comment On February 16, 2014, at 8:01 AM, candrsn1973 wrote:

    Also, I don't think any company would scoff at a $2 Billion business.

  • Report this Comment On February 17, 2014, at 7:08 AM, lrd555 wrote:

    Apple sold 47 Million iPhones & 26 million iPads last quarter alone. And like 7 million iPods. 5 Milion macs. That means a whole lot more $ is coming the iTunes way. What other company can make a 30%+ markup on hardware & still have more $ coming down the pike from each unit sold? Like Apple's a cash machine.

  • Report this Comment On February 17, 2014, at 7:17 AM, Mathman6577 wrote:

    @lrd555: Apple just gave some of that cash to shareholders in the form of buybacks and dividends :)

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2841208, ~/Articles/ArticleHandler.aspx, 8/31/2015 10:16:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

Today's Market

updated 1 hour ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:00 PM
AAPL $112.76 Down -0.53 -0.47%
Apple CAPS Rating: ****
GOOGL $647.82 Down -11.87 -1.80%
Google (A shares) CAPS Rating: ****