Show me their money!

August 28, 2005 5:32 AM

How much does Apple Computer gross for every dollar spent on iTunes?

I'm taking an Executive MBA, and one of my case studies is focused on digital music distribution in general, and iTunes specifically. I'm trying to find Apple's gross margin because I'm really interested in the Label's share of each $1. I've got access to Lexis/Nexis and a variety of academic database's, but haven't been able to find this information. I could probably noodle out a guess from Appple's annual report, and I'm currently slogging my way through their most recent 10K, but would prefer to benefit from someone else's work in this regard.

Anyone got a citable source?

posted by Mutant to computers & internet (14 comments total)

according to downhill battle Apple's cut is 35%.

you also might be interested to read notes from Apple's pitch to get indie labels on iTunes back in '93.
posted by sammich at 5:51 AM on August 28, 2005

The NARIP "iTunes Artist-Producer Royalty Calculation" sheet contains the following breakdown for major label artists (according to this article):

• Label: 55 cents
• Apple: 34 cents
• Artist: 10 cents

posted by RichardP at 5:51 AM on August 28, 2005

According to this site, which cites the Wall Street Journal (sub. req.) :

Consider the economics of the iTunes store. Apple charges 99 cents per song that is downloaded by a consumer. Of that 99 cents, Apple pays the record label about 65 cents for licensing rights to the song, estimates Charlie Wolf, an analyst at brokerage firm Needham & Co. Other analysts come up with similar figures. In addition, Apple incurs costs such as credit-card fees, which typically amount to 25 cents a transaction (which can include several songs), plus 2% to 3% of the amount charged. The result: On average, Apple earns less than a dime for each song it sells from the store.
posted by crunchland at 5:51 AM on August 28, 2005

oops. wsj link.
posted by crunchland at 5:54 AM on August 28, 2005

ooh wait just a gosh darn second here. After further investigation, it seems that last month Apple lowered their cut to 30%.
posted by sammich at 5:54 AM on August 28, 2005

From the NY Times two days ago: "At the price of 99 cents a song, the share of the major labels is about 70 cents." Article: Apple, Digital Music's Angel, Earns Record Industry's Scorn
posted by about_time at 6:03 AM on August 28, 2005

Apple are notoriously secretive about margins and cost breakdowns of products - Have a listen to this conference call to see what I mean.
posted by cillit bang at 7:10 AM on August 28, 2005

Everything I've read on the subject says that Apple makes pennies on the dollar with the songs, and makes the real money selling iPods.
posted by danb at 8:24 AM on August 28, 2005

iTMS will probably have done ~1 billion dollars in business by the end of the year, and it's recent turnover is at a nearly 500M year annualized rate.

On the one hand, I find it amazing that the credit card companies could continue to extract $125M and more in fees annually. On the other hand, Apple doesn't seem to have any choice.

I think it would be at least as interesting to have a good estimate of the credit card company's margins in relation to iTMS. That's not something I've seen anyone talking much about.
posted by Good Brain at 11:11 AM on August 28, 2005

I find it amazing that the credit card companies could continue to extract $125M and more in fees annually

I find that odd too. Is anyone here familiar with the industry? Why do artists continue to shack up with these guys, instead of distributing their own work on iTMS and pocketing the extra 70 cents?
posted by Popular Ethics at 1:02 PM on August 28, 2005

Why do the artists continue to shack up with which guys? I assume that you are referring to the record labels, which everyone seems focused on.

However in the line you quote, I was wondering after the seemingly exhorbitant rents the credit card companies receive for their role in making the online music market possible.

As to why recording artists continue to shack up with major record labels, there are lots of reasons, one being that Apple has not, to this point, been interested in having a business relationship with individual artits (at least not those who aren't U2).

That doesn't mean artists don't have more attractive alternatives than the major labels. As one example, CDBaby, which was linked above, started out as an online music store that would also do fullfillment for indy artists, then they started acting as a go between between iTMS, Rhapsody and others, and the artists. Their cut is 9% of the $.70/track (about 7 cents/track) that iTunes pays to the "Label."

As to why artists don't go with CDbaby, instead of a major label? The majors have the ability to move a hell of a lot more product. They have the promotional aparatus, they have the distribution relationships. A new act with a major label deal has the potential to get big faster than a new act doing things on their own. Their personal investment is minimal from a financial perspective as the label will carry a lot of the up front costs, they just put in their time, and such intangibles as their heart and soul. The flip side is if the band does well, the label gets their cut, and their cut is pretty damn big and generally extends through the third album or so.

What the labels do still has value, potentially, but they are still built for a world of physical distribution and limited airtime, and so their cost structure is completely out of wack. Right now, the thing they have going for them is that they have huge back catalogs, and for a little while longer, much of the music people want. In time though, more and more new acts will bypass them doing some of it themselves and relying on lower cost providers who don't have the baggage of the record labels. My guess is at that point, their main business will be backcatalog, and perhaps managing the back catalogs of independent artists for a small fee. There is also a good chance that they will acquire the upstarts and help them expand, since acquisition is often easier than restructuring one's existing businesses.
posted by Good Brain at 4:00 PM on August 28, 2005

Good Brain - Thanks!
posted by Popular Ethics at 8:00 PM on August 28, 2005

Their personal investment is minimal from a financial perspective as the label will carry a lot of the up front costs

This isn't really true. It's a con game run by the labels that takes advantage of young, naive musicians. Those costs are "recoupable", which means that they are essentially a loan by the record company to the band. The label will offer fancy travel arrangements and impose an expensive producer, and so the band starts out with a huge debt to the label.

If the disk sells well, the band doesn't get any money until everyone else gets paid. If the disk doesn't sell well, the contract will specify that they lose all creative control and need to keep producing music to pay off the debt.

Some of your friends are probably already this fucked.
posted by fuzz at 3:45 AM on August 29, 2005

Relevant article and discussion on digg recently: Networks make $1.44 per TV show from iTunes downloads.
posted by marc10 at 3:18 AM on January 30, 2006