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Report: App Store Sees Puny Profitability

Report: App Store Sees Puny Profitability

When it comes to profitability, Apple's App Store is a relative wimp, according to a report by Piper Jaffray analysts. Despite having served up billions of downloads to users through the years, by their reckoning, the operation accounts for just 1 percent of Apple's gross. They note, however, that the point of the App Store is less about lining Apple's pockets directly and more about driving highly profitable device sales.

By Katherine Noyes MacNewsWorld ECT News Network
06/23/10 11:18 AM PT

Apple's App Store is not the wildly profitable operation it might seem, but rather does just a little better than breaking even, according to a recent report.

In fact, the App Store has accounted for just US$189 million -- or about 1 percent -- of Apple's total gross profit since it launched almost two years ago, according to Piper Jaffray analysts Gene Munster, Michael Olson and Andrew Murphy, who released a report on the topic early Wednesday. Total gross profit during that time was $33.7 billion, the analysts noted.

"Over the same time period, the iTunes store has generated $3.6 billion in revenue, to which the App Store has contributed $429 million, or 12 percent," they added.

Gross Margin of 44 Percent

To calculate their figures, the analysts used metrics mentioned by Apple CEO Steve Jobs during a keynote speech at the Apple Worldwide Developers Conference earlier this month -- specifically, that $1 billion has been paid to developers for 5 billion free and paid app downloads.

From those metrics, the analysts inferred that the App Store has created gross revenue of $1.4 billion since its launch, netting Apple $429 million after the developer's cut of 70 percent.

Eighty-one percent of downloaded applications from the App Store -- totaling some 4 billion -- are free, resulting in a gross margin on revenue from the remaining paid apps of about 44 percent, they wrote.

That does not, however, factor in the roughly $81 million Apple has paid to store and deliver all the many free apps it's offered since launch, the analysts added.

'It Does Not Directly Move the Needle'

The average price of the top 50 paid iPhone apps is $1.49, they wrote; on the iPad platform, by contrast, it's $4.66 for the top 30 paid apps.

iPhone, iPad and iPod touch users download more than 16.6 million apps per day, which is nearly double the tracks downloaded on iTunes, they said.

The analysts' conclusion: "While it does not directly move the needle, the App Store brings new features to Apple's iOS devices and drives sales of iPhones, iPads and iPod touches."

'I Doubt the Company Is Worried'

"The notion that the App Store isn't a big profit generator for Apple seems pretty reasonable to me," Jeff Gamet, managing editor of The Mac Observer, told MacNewsWorld.

"Apple is paying out 70 percent to developers, plus it has to pay credit card processing fees along with the overhead to keep the App Store up and running," Gamet explained. "Most App Store downloads are free, and the rest are primarily made up of apps that cost less than $5, thanks in part to a pricing race to the bottom that started when the App Store first opened."

Nevertheless, "I doubt the company is worried," Gamet asserted. "Apple is primarily a hardware company, and services like the App Store and the iTunes Store are there to help promote hardware sales.

"Considering the number of iPods, iPhones and now iPads Apple is selling each quarter, I'm thinking the App Store and iTunes Store are performing exactly the way Apple wants," he added.

'It's About Selling Devices'

Indeed, "unlike Microsoft, where software means profit, I don't feel that Apple has ever been driven in that direction," Allen Nogee , principal analyst with In-Stat, agreed. "Even when you consider high-end software products, like Final Cut HD, I still do not believe that Apple expects to make much money, if anything, on those products."

For Apple, "it's about selling devices, and it always has been," Nogee told MacNewsWorld. "Let's not forget that it was Apple who first created and perfected the mobile 'Application Store,' and it was this application store that went on to drive millions of iPhones and thousands of developers making applications" -- which, of course, led to more iPhone sales.

It's interesting to note that during the early Mac vs. PC days, "when Apple was actually close to going out of business, it was cheap PC hardware that gave the PC a big advantage," Nogee pointed out. "Microsoft sold the main Office Suite as well as Windows software and made the majority of the profit from the deal."

'It Turned Out to Be Right'

During that same period, however, another trend occurred, he added.

Specifically, "while Microsoft made lots of money from Windows and Office, the ultra-low-price PCs convinced many that open source was the answer, and this has continued on today with Android and Linux phones," he explained. "Because of this, Apple became more convinced than ever that it was hardware and not software or apps that it wanted to make its money off of, and it turned out to be right.

"I don't believe Apple even knew at the time what a good move it would turn out to be," Nogee concluded. "If Apple had decided, as many companies do, that it needs to make a profit in all areas, and had only given developers 30 percent of sales rather than 70 percent, then things might be very different today."

'We Will Have to Watch'

Of course, the app revolution is still brand-new, telecom and wireless analyst Jeff Kagan told MacNewsWorld.

"There are so many apps in the marketplace now, it is difficult to find what you are looking for," Kagan pointed out. "Like every new opportunity, there may be a lot of activity, but not a lot of money in the early stages.

"We will have to watch this segment develop as it matures," he concluded.


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