iTunes Not Exactly Break-Even Anymore

Conceived as a low-margin “break-even” operation intended to drive hardware sales, Apple’s iTunes Store may be evolving into a significant profit center for the company, thanks to the addition of some new content categories. One in particular: Apple software.

While Apple’s margins on music, video, book and app sales through iTunes remain in the low single digits, the margins on software like the iWork and iLife suites, Final Cut Pro, Aperture and the like are much higher.

Now that Apple has folded its software group into iTunes, those products — which were once sold as boxed software — are sold though the Mac App and iTunes App stores. And, as Asymco’s Horace Dediu notes, that has significant implications for iTunes margins.

Dediu figures that Apple-made software sales were about $3.6 billion in 2012. If Apple’s profit margins on those sales is in line with industry norms — about 50 percent — then the profit margin for the iTunes business overall increases to the point where it’s no longer simply breaking even. Said Dediu, “iTunes inclusive of Apple’s own software generates as much as 15 percent operating margin on gross revenue.”

According to Dediu, iTunes had $13.5 billion in revenue in 2012; 15 percent of that is a little more than $2 billion.

Hell of a way to break even.