Although Apple has repeatedly said that its iTunes Store operates at “just above break even,” a thorough analysis of the service’s economics suggests it turns a profit roughly in line with the company average, with recent events paving the way for even greater gains.
Based on per-song cost estimates, the ubiquitous iTunes service generates an operating profit of at least 10 percent, and possibly as much as 15 percent, according to PacificCrest’s Andy Hargreaves. The analyst on Monday released a detailed report on the subject, in which he informed Apple investors that the economics of iTunes could soon serve as a boon for the company’s bottom line.
“For each $0.99 song, we estimate that Apple pays $0.70 to major labels, which own over 85 percent of the market, and $0.60 to $0.65 to independent labels, which drives an average price per song of approximately $0.69,” he explained. On top of that, of course, are Apple’s network fees, transaction fees, and general administrative expenses associated with operating the iTunes Store.
Hargreaves calculated the network fees at $0.05 per song, which includes the delivery fee, and the hardware and software to facilitate delivery. “Operating expenses are likely less than $0.05 per song, based on the relatively small number of employees we believe work on iTunes,” he wrote.
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