Once more – Apple iTunes economics 101: I’m not going to point to the stories that caused me to draft a version of this rant last night, but lets just say they are long explanations about the amount of revenues generated by music and video downloads on iTunes and how much Apple is or is not making on such downloads. These reports and “analyses” seem to marvel that “content creators” can make lots of money distributing their “content” through iTunes with Apple taking just a small cut. Why do these analyses bother me? They ignore the obvious — or as we business people like to buzzword it: they ignore the elephant in the room.
So, one more time, here it is: Apple’s business model is driven by selling $400 iPods that play video files, not by selling the videos that play on them. The thin profit it makes (if any) from the margin it clears on 55¢ of revenue (which, I’ll go slowly, is different than earnings) is a knot on a gnat’s ass compared to revenue represented in the margin Apple enjoys on the sale of hardware. Remember, Apple makes $0 from facilitating the distribution of podcasts, but it generates $100 – $400 each from selling iPods that play those podcasts. In the business model of Apple, the thin margin it clears on video and audio downloads, even if that margin represents profits that reach into the tens of millions of dollars (which is doubtful due to the costs incurred in generating those revenues), is mere icing on the cake of the revenues those downloads represent in the corresponding sale of iPods those downloads drive. Because Google and Yahoo and other music and video download channels have no corresponding hardware sales revenue, it’s harder to make their math work. It also explains why Microsoft is going to sell its own “digital player” in order to generate a hardware revenue stream in this category. (My prediction: more likely to be an X-Box branded PSP competitor than an iPod threat.)
Where Apple finds itself in the digital download “space” is much like the position RCA enjoyed in the early days of broadcasting in America. Back then, RCA manufactured most of the radios and controlled the distribution channels (two NBC radio networks) of programming. (In RCA’s case, it also created the programming — the records and radio shows . Apple doesn’t do that — although other holdings of Steve Jobs are involved in that enterprise.) I feel certain, despite the dominance of the radio networks it owned (and which the government broke up), RCA’s most significant revenue stream came from the hardware it produced and sold using the advertising mascot Nipper, the little dog listening to “his master’s voice.” (For the record, I wasn’t around back then. I was born the same month and year the first color TV was manufactured by RCA, however.)