App developers receive $12 for each iOS device sold

One of the more interesting numbers reported by Tim Cook during the last earnings conference call was the total payment to developers during the fourth quarter. This is the first time that Apple reported a quarterly payout to developers.

The figure was $700 million and it was mentioned in reference to the total payments to date of $4 billion. The $700 million is interesting at least because it gives an idea of what Apple obtained in total sales of Apps. As it retains 30% and pays 70% to developers then it follows that it retained $300 million and the total “gross” sales was $1 billion in Q4.[1]

The $700 million is interesting for another reason. The $1 billion in gross income can be tested against another set of data. As the countdown has already started, sometime in February Apple will report 25 billion total apps downloaded. The last such milestone was October 4th when it reported 18 billion downloads. Assuming that they will cross 25 billion by February 25th, then we can obtain an estimate for the download rate per day: about 48.6 million apps/day.

That is a figure we can plot historically:

I plotted it in relation to the songs download rates obtained through a similar method. Although we don’t have an update on total songs downloaded, the rate is unlikely to have accelerated as much as apps did. The following charts also shows the reported total downloads by media:

Normalizing to the same starting date, the two media ramps are shown below:

But back to the figure of $700 million paid to developers and the implied $1 billion in gross revenues. Taking that figure and dividing it by duration of the quarter yields a figure of $310 million per month gross app revenues. The 25 billion downloads to date paired with the $4 billion in payments to developers gives us an approximate revenue per download of 23c. Computing the monthly revenue from the 48.6 million/month rate we get about $316 million per month. Pretty close to the $301/mo that the quarterly payout implies. This therefore also confirms the 23c per download (it looks a bit high but not by much.)

So the $700 million payout and the $4 billion payout to date and the 25 billion downloads all fit together as consistent pieces of a puzzle that give insight into the iTunes economy.

1. Apple reported nearly $7 billion in iTunes stores revenue (though the apps were only counted for the 30% agency fee.) during 2011.
2. If gross revenues were measured, the iTunes economy was about $10 billion in 2011.
3. Payments to content publishers were in the vicinity of $7 billion of which $2.1bn was paid to developers.
4. Operating costs for iTunes were therefore approximately $3 billion/yr.

One other interesting result: Since iOS devices started shipping, there have been over 335 million units sold. As 25 billion apps have been downloaded into them then about 75 apps were downloaded for each unit sold. Since we know the average price (23c) and the payout ratio (70%) then all this boils down to the fact that each iOS device generates $17 of iTunes income from Apps alone. That also means that each iOS device sold results in a minimum payment of $12 to iOS developers.

I’ve noted that Apple should be valued as a recurring payment from a satisfied customer base. A contributor made a comment that summarized it well: the payment schedule is approximately $1/day per computing unit (device or computer or tablet).

Now it becomes clear that Apple should also be seen as a recurring ecosystem payment system. Given a 24 month lifecycle, the amount is approximately $0.5 per device per month.

In other words, if you are an iOS developer you should note iOS device sales and use the rule of thumb that each one sold creates fifty cents of monthly income for you and your peers to share.

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Note:

1. Apple reported its iTunes income (as the anachronistic “Music” line item in its Income Statement) as $2.027 billion in Q4.It would be tempting then to think that Apple got $1 billion from apps and $1 billion from songs and videos and iBooks. This is not the case however.

   Apple does not report all its app income (what I call gross income). Under the “agency” model of retail sales it reports only the part it retains, keeping the 70% paid to developers off its books. Therefore, of the $2 billion in iTunes income, only $300 million were actually booked from apps. That therefore implies that Apple’s “everything-but-apps” iTunes revenue was $1.7 billion.

   Note however that the non-app income is mostly gross income and the payouts on that income will be significant (as much as 90% depending on many factors).