Market data & competition.
Survey data on US College students’ music player share.
Can’t wait for the Youtube video of the Zune team getting down with an iPod funeral. After all, the Zune has higher market share than the recently celebrated Windows Phone 7.
The Apple-branded campus – Apple 2.0 – Fortune Tech
In recent articles I highlighted the acceleration in iTunes App downloads where the rate is approaching 18 million apps per day and the cumulative total apps which is about to overtake the cumulative songs downloaded.
We now turn our attention now to constructing the iTunes income statement: namely total sales, gross margins and deduce its operating budget.
To obtain the top line (income) for iTunes we need to know the average selling price (ASP) for songs and for apps. Apps are easy, we received that info in June: $0.29 per app. For songs, it was easy before early last year: $0.99/song. After the selective price increase, the blended price needs to be estimated. I chose $1.10 for 2009 and $1.2 for 2010. These are just assumptions and can be adjusted but should give us a rough estimate:
I followed the convention of using income rate or $/month to show the history of sales. It shows that even with a price less than a third of the music product, apps are generating over half of the sales of music. In other words, apps are adding 50% to iTunes sales today. If the decline in music units continues and the app sales increase with the current trajectory then app sales value will overtake music sales next year, consistent with the cross-over of cumulative units sold.
If we know how much Apple pays music licensors and developers (i.e. cost of goods sold) we can calculate how much it keeps for operations (gross margin). Apple’s app margin is 30 percent. The music margin was never official but the consensus has been 10 percent for a while.
Using these figures, we get the following chart:
This shows that what is left after paying the content license, Apple “keeps” about $50 million every month to run the App store (iTAS) and another $30 million to run the Music store (iTMS).
Apple has made a point of saying that both iTAS and iTMS are run at “break even” implying that the gross margin is used up in operating costs (CAPEX, R&D, SG&A). To be sure, the cost of bandwidth and the data center(s) needed must be considerable.
But the operating budget for the store is beginning to reach a level that may be beyond what can be spent reasonably. The amount left over for operations has increased from ~$30 million a month in 2009 to $75 million/month today.
In fact, if this burn rate is maintained (even though it’s increasing) the operating budget for iTunes is nearing $1 billion/yr.
I’m not an expert on the cost of operating data centers but $ 1billion a year seems like a lot. I would love to see an analysis of how this could be allocated.
I would also add that because of the increasing mix of apps, the overall gross margin percent is increasing. I estimate that to be a blended 17%–a healthy margin for a content store–and an increase from 10% before the app store came online.
Finally, one implication of the economics involved is that a budget like this may provide a significant barrier to entry for any competitors looking to take on the iTunes juggernaut. iTunes has reached content critical mass (12 million songs), user base (160 million users) and wide distribution (23 countries for songs and 80+ countries for apps).
These are non-trivial operational issues that even the best in the “cloud” business models will find challenging.
This discussion excludes video sales, rentals, book sales as we don’t have solid histories for these product lines. However, we can do a spot check on the cumulative totals:
iTMS content downloads have generated $16.4 billion in sales to date.
Last week I posted the iTunes download rate graph that showed how Apps are being downloaded much more rapidly than songs and revealed an inflection point in the song rate.
Based on the recent updates to iTMS and iTAS on Sept. 1, the following graph shows the cumulative units of songs and apps downloaded indexed to the same starting date.
As can be seen, the App store has reached the same total downloads in 2.2 years as the iTMS reached after five years. The two curves are likely to be the same height (around 13 billion each) before the year is over.
Thirty days after the launch of the iTunes App Store, Apple announced that 60 million apps were downloaded in the first month of operations generating sales of $30 million. “This thing’s going to crest a half a billion, soon,” Jobs said adding that it may be a “$1 billion marketplace at some point in time.”
Mr. Jobs was being modest.
To see how modest we have the following data:
If the current download rate is maintained (17 million apps/day) and if the pricing of $0.29/app is preserved, then $1.8 billion will have been spent on iOS apps this year.
With the rate of downloads increasing as steeply as it is, $2 billion in sales is not unlikely in the third year of the store. Twice what Jobs was predicting for “some point in time”.
The other line in the graph is the iTunes music download rate. I’ve written about it before and pointed out that the point of inflection in the download rate coincided with the increase in price for songs from $0.99 to $1.29. Not much more to say here except that the trend continues and music downloads continue to slow.
As far as Apple is concerned, the slowdown in iTMS is more than offset by the increase in iTAS. As far as the music industry is concerned, I don’t think CD sales are increasing. Does anyone know?
At the September 1st music event, Apple announced that 6.5 billion apps were downloaded and that there had been 120 million iOS devices sold.
This works out to 54 apps per iOS device.
On June 7 Apple reported 5 billion apps over 100 million iOS devices or an average of 50 apps for iOS device.
On April 8th, I computed that the app attach rate was 47.
Is this rate noteworthy?
Let’s rewind to two years ago. August 27th, 2008, soon after the App store launched.
Nokia had just declared that its users had downloaded over 90 million applications over the past 2 years. An analyst estimated that over 100 million users globally use Nokia smartphones/converged devices, implying an attach rate of less than 1 app/smartphone.
My, how expectations have changed.
According to Gartner, mini notebooks constituted less than 18.0% of the total mobile PC market in the second quarter of 2010, down from 20.0% of the total market at 2009-end. Gartner expects mini notebooks market share to drop to approximately 10.0% by 2014.
However, worldwide PC shipments are projected to total 367.8 million units for the full year 2010,
via Near-Term PC Growth Not Visible – Yahoo! Finance.
Speculation about the iPad production ramp indicates that the iPad will ship about 14 million units this year and 36 million next year. Projecting a forward growth rate of 50% and adding the Gartner forecast above gives us the graph on the left.
The iPad (plus competitors) will likely overtake the sales of mini notebooks as soon as 2012. The collapse in netbook sales is likely to be much more rapid than Gartner suggests.
“In our view, investors are missing the way BlackBerries are eating into Nokia’s messaging phone share in Europe, Latin America and Southeast Asia now that the E-series demand is slowing,” he writes. “We believe the Torch is on pace for 500K units in August,
via Research In Motion: MKM Still Bullish; Cites Growth Outside U.S. – Tech Trader Daily – Barrons.com.
Torch selling 500k units a month may be good news to RIM but it’s hardly a barnburner.
The news about Nokia losing share to RIM is another curious data point. First, because it identifies two competing smartphone classes (E-series and Blackberries) as “messaging phones”. That’s like saying that HP is losing share to Dell in the “email PC” business. Though the classification of general purpose devices by single uses is probably fair here since these devices are not much good for anything else.
The latest iOS numbers and the new iPod touch launch demonstrate what a huge hit the iPod touch has become. It’s safe to assume that about half of all iPods, or between 4 and 5 million units in the current quarter, are sold as touch versions.
The iPod touch has been around about as long as the iPhone. It was launched three months after the first iPhone 2G, almost exactly three years ago. While the iPad has been in the market less than six months, a large number of potential competitors have been launched running Android and there seems to be a real rush to market. Six months is about as quickly as any hardware product can be reasonably engineered.
So the question is why is the iPad being cloned while the iPod has remained in the market by itself?
The value of the iPod is arguably as high with a healthy margin and consistent pricing. The volumes are comparable with tens of millions already sold so there is no obvious economic disadvantage to the iPod vs. iPad. Indeed, the iPod touch is a large (1.6) multiplier to the whole iOS platform. The demographics are very sweet too with a clear upsell opportunity.
One explanation might be that the iPod is a music device and that market has been locked up with iTunes, putting up a huge barrier to entry. However during the music launch this month, there was almost no mention of the iPod touch as a music player while it was loudly touted as a game and app platform. Browsing and Facetime are also huge uses for the device.
So in the iPod touch we have a mini iPad–ironically, the dig at the iPad was that it was nothing more than a large iPod touch.
So if cloners are rushing to copy the iPad, why not its smaller incarnation?
“We are not seeing visible demand for Symbian,” she said.
via Samsung says to focus on Android, bada software | Reuters.
I was ready to dig into this, but the same person is quoted saying this of Microsoft’s new Windows Phone:
“There is still some professional, specialized demand there,”
Whaaa?
Windows Phone is anything but professional and specialized. It’s designed to orphan business users and is targeted to mainstream use.
Another example of head-scratching random marketing word generation.
Ghai now estimates that Apple will sell 5.75 million iPads in the quarter that ends Sept. 25, up from an earlier estimate of 5 million, and 22 million in fiscal 2011, up from 19.5 million.
via The iPad as Trojan horse – Apple 2.0 – Fortune Tech.
That’s very close to my estimate of 21 million, though I might add that my estimate is unrevised since US supply met demand. There are still markets which don’t have iPad distribution however, so we’ll see if global demand can be met before year end.
By the way, the estimate of 5.75 million for this quarter is higher than all but three of 14 analysts estimates on iPad unit forecasts *for the first year*.
