As writer John Paczkowski notes in an AllThingsD article today, iTunes was originally “conceived as a low-margin ‘break-even’ operation intended to drive hardware sales” — in particular sales of iPods. Now that the iTunes Store is used to sell more than just songs and videos, it’s turning into a “significant profit center for the company”.
Paczkowski was commenting on numbers from Asymco analyst Horace Dediu, who notes that now that Apple has folded its in-house software group into iTunes, Apple software is having “significant implications for iTunes margins.” The software, including items like iWork, iLife, Final Cut Pro, Aperture and more, has much higher profit margins than traditional iTunes items like music, books, video, and apps.
Dediu deduced that Apple sold about US$3.6 billion worth of its software products in 2012, and that profit margins for software is usually about 50 percent. If that’s the case for Apple — and Dediu is usually correct in his assumptions — then iTunes is generating operating margins of about 15 percent on gross revenue. That’s about $2 billion in profit for 2012, or as Paczkowski so eloquently put it, one “hell of a way to break even.”