iTunes Store a greater cash crop than Apple implies?

[AppleInsider]

Although Apple has repeatedly said that its iTunes Store operates at "just above break even," a thorough analysis of the service's economics suggests it turns a profit roughly in line with the company average, with recent events paving the way for even greater gains.

Based on per-song cost estimates, the ubiquitous iTunes service generates an operating profit of at least 10 percent, and possibly as much as 15 percent, according to PacificCrest's Andy Hargreaves. The analyst on Monday released a detailed report on the subject, in which he informed Apple investors that the economics of iTunes could soon serve as a boon for the company's bottom line.

A breakdown of per-song fees

"For each $0.99 song, we estimate that Apple pays $0.70 to major labels, which own over 85 percent of the market, and $0.60 to $0.65 to independent labels, which drives an average price per song of approximately $0.69," he explained. On top of that, of course, are Apple's network fees, transaction fees, and general administrative expenses associated with operating the iTunes Store.

Hargreaves calculated the network fees at $0.05 per song, which includes the delivery fee, and the hardware and software to facilitate delivery. "Operating expenses are likely less than $0.05 per song, based on the relatively small number of employees we believe work on iTunes," he wrote.

Then, of course, there's the transaction fee -- or royalty paid to credit card companies each time a sale is processed -- which Hargreaves argues is "the primary reason iTunes profitability has not been higher historically." However, he notes hat Apple has recently adopted a number of measures to limit those fees, such as managing a weekly sweep of its credit card transactions, broadly distributing gift cards, and by encouraging larger transactions through services such as "Allowance."

Therefore, the analyst believes the iPod maker is now forfeiting only around $0.10 per song per song to credit card firms, compared to as much as $0.25 per song when iTunes first launched. "Going forward, we expect Apple to continue improving its payment schemes to cut down on transaction fees and improve the profitability of iTunes," he added.



Based on those cost estimates per song, Hargreaves arrived at the 10 percent margin estimate. Applying that estimate to the $1.2 billion in revenue that iTunes is expected to generation in fiscal 2007, he believes the service will generate $0.09 to $0.14 in earnings-per-share for Apple.

DRM-free tracks present incremental profit opportunity

Perhaps even more compelling, according to the PacificCrest analyst, is the incremental profit opportunity presented by the Cupertino-based firm's joint announcement with music label EMI to start selling DRM-free tracks at an approximate 30 percent premium.

"Consumers desire for mobile content drove the explosion in digital music and the growth of iPods. However, consumers became enamored with the quantity of music that the iPod enabled them to access, and sacrificed quality, in our view," he wrote in the report. "Going forward, we believe that consumers will expect mobility and will increasingly look for higher quality as the next step in improving their music experiences, particularly as consumers increasingly use iPods and iTunes as a source of content for home and car stereos."

Hargreaves cited sources who suggest that the economic split between EMI and Apple is likely to remain constant for the higher-quality, DRM-free songs that begin to crop up on iTunes starting next month. Since the songs will retail for $1.29 rather than $0.99, he estimates Apple to receive $0.09 of incremental gross profit per song. While delivery fees should double due to the larger file size of higher-quality songs, the analyst has assessed those network costs at $0.02 or less per song.

Assuming that half of EMI tracks purchased through iTunes will be of the higher-quality DRM-free tracks, Hargreaves estimates the move could generate approximately $24 million of incremental revenue, and just under $6 million of incremental profit for Apple in a year. In his note to clients, the analyst acknowledged that those numbers may seem insignificant, but said they would grow quickly if other labels followed suit in offering the DRM-free tracks.

A subscription model could add $900 million in revenues per year

Another source of incremental iTunes revenue could arrive in the form of an iTunes subscription service. According to the report, Apple has already developed and is capable of launching such a service but has thus far found no compelling reason to do so. However, Hargreaves believes that an increase in competitive offerings and pressure from iPhone mobile carriers could force Apple add the service within the next 18 months.

"Carriers are in the unique position of having a network that can deliver music, a captive customer base of billions of people, and ubiquitous devices that are capable of playing music," he wrote. "We expect approximately 1 billion music-enabled phones to be sold next year. As network speeds increase, battery life on cell phones improves and storage grows, we believe that music offerings from carriers will become extremely viable competitors with iTunes."

However, the analyst believes an iTunes subscription service could prove to be beneficial to consumers while helping to monazite the iPod install base, rather than simply representing a defensive move on Apple's part. Based on a customary 50/50 split of a $10 to $15 monthly subscription charge between Apple and the labels, the iPod maker could see $900 million in added revenue should such a service penetrate to just 10 percent of its iPod base.

Keep an eye on April 28

Hargreaves in his report hinted that some of the aforementioned changes could arrive sooner than later. He notes that Apple launched iTunes on April 28, 2003 and that it typically negotiates one-year contracts with the labels. "As a result, we believe that the company is currently in renegotiations for its current contracts. Apple will likely maintain its firm grip on digital music in the near future, regardless of whether changes to iTunes are included in the current round of negotiations," he wrote. "However, 80 percent of music is still purchased in physical form, which suggests that the digital music market is still young. If Apple intends to keep its hold on digital music over the long term, we believe it will eventually have to become as innovative with iTunes as it has been with its hardware."

Apple priced at $130 a share

Hargreaves maintains an outperform rating and $130 price target on shares of Apple for PacificCrest.

[ View this article at AppleInsider.com ]

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[pazimzadeh]

I wonder how much more it costs for iTunes to offer 256 kbps music instead of 128kbps. Also, anyone know how many songs an iPod can hold that is filled with 4 minute songs at 256 kbps?

[SymeonKilo]

Probably holds roughly half as many at 128k?

[pazimzadeh]

Well people are saying 256kbps isn't twice as good as 128kbps so I was just wondering what the exact number was, but thanks.

[Wally]

Subscriptions just don't make sense for music. Apple is pushing for DRM-free tracks and succeeded with EMI's deal - adding a subscription model now would mean putting DRM back in.... no thanks... now a movie-rental service would be a good idea...

[Ireland]

They should make a few Euors too if they ever get Movies and TV Shows into Europe.

[Mr. H]

What a load of fluff. Isn't it obvious that he sat down and cooked up some reasonable-sounding numbers to end up with a nice round 10% operating profit margin?

[Porchland]

The cost model makes me wonder when Apple is going to get into the label game. Why give up $.70 cents every time someone downloads a John Mayer song when you can sign John Mayer, significantly improve margins and farm out the CD rights to someone else?

Apple has a tremendous promotional engine. Sign an act, put them in an iPod commercial, promote them on the iTunes podcast, iTunes, Apple.com, etc. Pick the right artists, and Apple could have an instantly viable label.

[g5man]

Originally Posted by Porchland

The cost model makes me wonder when Apple is going to get into the label game. Why give up $.70 cents every time someone downloads a John Mayer song when you can sign John Mayer, significantly improve margins and farm out the CD rights to someone else?

Apple has a tremendous promotional engine. Sign an act, put them in an iPod commercial, promote them on the iTunes podcast, iTunes, Apple.com, etc. Pick the right artists, and Apple could have an instantly viable label.

The problem arises when 80% of the songs are still purchased via CDs. Apple has great negotiating power for digital music, but trying to become a label is stretching it.

[davebarnes]

Originally Posted by pazimzadeh

Anyone know how many songs an iPod can hold that is filled with 4 minute songs at 256 kbps?

My wife's iPod Shuffle (1 GB) has approximately 3 hours of music on it. All of it is 256 kbps.

[noirdesir]

Originally Posted by pazimzadeh

I wonder how much more it costs for iTunes to offer 256 kbps music instead of 128kbps.

According to the report, the costs associated to 'physical' delivery of the song are around 5 cents for the 128k songs and 7 cents (two cents more) for the 256k songs.

[dimmer]

Well, he's way off the mark on the transmission costs, didn't include the credit card processing fees (apple charges per purchase, not waiting for a $10 price to be hit) and "forgot" that iTunes delivers around 10 previews (30 seconds each) for each sale. Nothing exists in a vacuum, Pretty sloppy work.

If Apple were to offer a higher bitrate it would be 192kbps - with AAC it is impossible to tell the difference with the human ear of anything above that. I didn't run the test myself, but it's out there: try google.

[digitalclips]

Back on topic.

Wow, good news for Apple's stock.

[Mr. H]

Originally Posted by digitalclips

Back on topic.

You what? Which posts have been off-topic?

Originally Posted by dimmer

Well, he's way off the mark on the transmission costs, didn't include the credit card processing fees (apple charges per purchase, not waiting for a $10 price to be hit) and "forgot" that iTunes delivers around 10 previews (30 seconds each) for each sale. Nothing exists in a vacuum, Pretty sloppy work.

Good point about the previews. But you must have missed this bit from the report:

Originally Posted by AppleInsider

Then, of course, there's the transaction fee -- or royalty paid to credit card companies each time a sale is processed -- which Hargreaves argues is "the primary reason iTunes profitability has not been higher historically." However, he notes hat Apple has recently adopted a number of measures to limit those fees, such as managing a weekly sweep of its credit card transactions, broadly distributing gift cards, and by encouraging larger transactions through services such as "Allowance."

Therefore, the analyst believes the iPod maker is now forfeiting only around $0.10 per song per song to credit card firms, compared to as much as $0.25 per song when iTunes first launched. "Going forward, we expect Apple to continue improving its payment schemes to cut down on transaction fees and improve the profitability of iTunes," he added.

Originally Posted by dimmer

If Apple were to offer a higher bitrate it would be 192kbps

Obviously you missed the major news from EMI and Apple at the beginning of the month that Apple will be offering non-DRM tracks at 256 kbps AAC from EMI, starting in May. Apple said that by the end of the year, 1/2 of the store content will be available in this form; implying that other labels, major and independent, will join EMI in removing DRM and upping quality.

[caliminius]

Originally Posted by dimmer

Well, he's way off the mark on the transmission costs, didn't include the credit card processing fees (apple charges per purchase, not waiting for a $10 price to be hit) and "forgot" that iTunes delivers around 10 previews (30 seconds each) for each sale. Nothing exists in a vacuum, Pretty sloppy work.

If Apple were to offer a higher bitrate it would be 192kbps - with AAC it is impossible to tell the difference with the human ear of anything above that. I didn't run the test myself, but it's out there: try google.

Actually, the iTunes store will consolidate purchases within a given time frame. They don't wait for $10, but if you buy a song or two today then purchase a few more the next day, chances are good they'll be one charge on your card. I'm not a big iTunes purchaser, but I've seen it happen on my limited purchases.

As for the 192kb/s, well I would have to imagine it depends which human ear is listening. Maybe the average person can't tell the difference, but what is average? It's also probably a bit like frame rates in video. The human eye can only perceive so many frames per second yet more frames beyond that limit still increases the perceived quality of the video.

[JeffDM]

Originally Posted by dimmer

Well, he's way off the mark on the transmission costs

Right, but I don't think transmission costs are nearly that high.

, didn't include the credit card processing fees (apple charges per purchase, not waiting for a $10 price to be hit)

The article doesn't mention a $10 boundary. I'll have to check my agreements, but I think $0.01 per track on card charges would be about a $3 average transaction. Apple does wait a little bit though, I don't think it is weekly, but I've seen them wait a couple days. If they can consolidate charges, then their costs per track goes down a lot.

If Apple were to offer a higher bitrate it would be 192kbps

What do you mean? Apple already announced a 256kbps rate. Have you missed the EMI deal announcement?

[damiansipko]

Originally Posted by Porchland

The cost model makes me wonder when Apple is going to get into the label game. Why give up $.70 cents every time someone downloads a John Mayer song when you can sign John Mayer, significantly improve margins and farm out the CD rights to someone else?

Apple has a tremendous promotional engine. Sign an act, put them in an iPod commercial, promote them on the iTunes podcast, iTunes, Apple.com, etc. Pick the right artists, and Apple could have an instantly viable label.

'Cause Apple Corps LTD. would probaly sue -- again

[JeffDM]

Originally Posted by Wally

Subscriptions just don't make sense for music. Apple is pushing for DRM-free tracks and succeeded with EMI's deal - adding a subscription model now would mean putting DRM back in.... no thanks.,

Put the DRM "back in"? From what I remember of the deal, EMI tracks will be offered in both DRM/128 and non-DRM/256 variations, so it's not as if Apple is completely eschewing DRM.

[eAi]

Hes just picked a load of fairly random numbers that seem possible, I don't really think this should be considered very accurate. Theres no sources quoted, no real research, its just him saying "well, things must be cheaper than they were, lets say its about 10% now"...

[EruIthildur]

Originally Posted by JeffDM

Put the DRM "back in"? From what I remember of the deal, EMI tracks will be offered in both DRM/128 and non-DRM/256 variations, so it's not as if Apple is completely eschewing DRM.

It's just letting the consumer decide.

[dimmer]

Obviously you missed the major news from EMI and Apple?

Nope, I didn't: but that's one deal with one label. Not everyone. Apple are free to do what they want, ans there is a customer mindset that 256 is better than 192 when it's not. That said, the file sizes are roughly the same (because digital sampling above 192 using AAC will always produce the same result).

I don't think transmissionscosts are nearly that high.

You'd be surprized. I don't think Akami is used for iTunes any more, but when they were in the picture, well let's just say that would be a great deal.

[JeffDM]

Originally Posted by dimmer

Nope, I didn't: but that's one deal with one label. Not everyone. Apple are free to do what they want, ans there is a customer mindset that 256 is better than 192 when it's not.

Apple does not have a tendency to have a broad spectrum in their products. I think it is very unlikely that they will offer 256 with some labels and 192 with others, whether or not it makes any audible difference between the two.

That said, the file sizes are roughly the same (because digital sampling above 192 using AAC will always produce the same result).

I don't understand why you say that, unless you are assuming variable bit rate will be used. Given that Apple generally uses constant bit rate in their iTunes audio files, you should be able to multiply the number of seconds by the bit rate and arrive at the file size in bits. Maybe the perceived audio might be the same, but one file should be almost exactly 33% larger than the other. If it's not, then something is probably wrong.

[ogun7]

Originally Posted by Porchland

The cost model makes me wonder when Apple is going to get into the label game. Why give up $.70 cents every time someone downloads a John Mayer song when you can sign John Mayer, significantly improve margins and farm out the CD rights to someone else?

Apple has a tremendous promotional engine. Sign an act, put them in an iPod commercial, promote them on the iTunes podcast, iTunes, Apple.com, etc. Pick the right artists, and Apple could have an instantly viable label.

Unfortunately you really don't have a grasp of what record labels really do. They spend a tremendous amount of money marketing and developing talent. Pressing and distributing music is a peripheral business. Record companies get your video on MTV, your song on the radio and your face on the Late show. That takes a way different turn than posting music files on a website. In reality, Walmart, Amazon and Apple are music distributors.

[JimmyTJ]

Unless I missed something, the figures are missing the costs for actually developing iTunes. If Apple combines the costs associated with iTunes development into the same cost center as those necessary to maintain the store, then Apple claims of barely breaking even on the store may be correct/truthful.

However, with Apple's market share of song downloads (legal ones at least), Apple would be crazy if they didn't attempt to generate greater profits out of the store. If we were to project Apple's market share into a future where the majority of music is purchased on-line, we are looking at serious $$, probably greater than the revenue actually generated from iPods. Another thing to keep in mind is that iTunes would also generate a more favorable cash flow than what hardware sales generate, making iTunes an even bigger opportunity for future revenue growth.

Assuming the $.10 cost for credit card transactions to be fairly accurate, these charges would make the most sense to target since they are transactional costs and won't decrease with increased volumes. Some sort of "subscription" service would be one way to limit these transaction costs. I would guess that if we start to see iTunes music sales increase, thus illustrating the future potential of iTunes as a revenue stream, I would expect to see all kinds of changes as Apple seeks to take advantage of the growth potential.

[JeffDM]

Originally Posted by JimmyTJ

Assuming the $.10 cost for credit card transactions to be fairly accurate, these charges would make the most sense to target since they are transactional costs and won't decrease with increased volumes. Some sort of "subscription" service would be one way to limit these transaction costs.

$0.10 is probably approximated average. The transaction cost has a fixed and percentage parts. Very roughly speaking, a transaction is something like $0.25 + 3%, the percentage varies a little bit based on many factors. That's why I think $0.10 a song assumes that the average transaction is about $3, or more, because $3 leaves out charge backs and some other issues.

[SpamSandwich]

Originally Posted by Porchland

The cost model makes me wonder when Apple is going to get into the label game. Why give up $.70 cents every time someone downloads a John Mayer song when you can sign John Mayer, significantly improve margins and farm out the CD rights to someone else?

Yes, I made that same point recently, and I believe they're going to sign some really, really big acts to get the ball rolling.

[bdj21ya]

Originally Posted by pazimzadeh

Well people are saying 256kbps isn't twice as good as 128kbps so I was just wondering what the exact number was, but thanks.

This is really pretty simple math. Those little letters at the end of the number stand for kilobits per second. 256kbps is equal to 32 kilobytes for each second of music (8 bits to a bye). So, each 4 minute song would be 7.68 MB (32 KB/sec * 240 seconds, divide by 1000 to convert KB to MB). There is also some very small overhead for the ID3 tags and probably a bit for the Fairplay protection, though I'm not quite sure how that is implemented. Hence, 256kbps would be almost exactly, not "roughly" twice the size of 128 kbps.

Now, as for figuring out how many of those fit on an iPod, that's a bit trickier, since Apple is reporting the sizes where each prefix (kilo- mega- and giga-) is 1000 times larger (as I did above also). However, on a computer (as well as in iTunes most likely) each of those prefixes is 1024 times as large (that's one of several reasons why your hdd never shows up as large as the number on the box). Also, there is space taken up by the iPod OS, extras, as well as a bit for the album thumbnails it adds on the nano and video iPod (I'm not sure if it includes some thumbnails on the shuffle now, just for syncing to another computer). Finally of course there's the space taken up by any contacts or calendar stuff you sync.

[melgross]

Originally Posted by damiansipko

'Cause Apple Corps LTD. would probaly sue -- again

Nope! New latest deal allows that as well.

But, Apple would be crazy to do it.

[lfe2211]

I thought occurred to me as I read through this thread. If Apple can reduce transaction fees, it can increases iTunes profits significantly.

Google is in the process of building up its Google Checkout payment system. Right now through Dec.31, 2007, it's a sweet heart deal for merchants--it's free. Beginning January 1, 2008, the cost per transaction goes to 2% plus $0.20 per transaction. However, if you're a Google AdWords advertiser, you are eligible for free transaction processing for some or all of your Google Checkout sales each month. For every $1 you spend on AdWords each month, you can process $10 in sales the following month for free through Google Checkout. So assume a Google Checkout merchant spends $1,000 on AdWords in the month of April. In the month of May, the merchant would then be able to process sales up to 10 times their AdWords spent for free, which in this case is $10,000.

So, if Apple and Google partner in a program , negotiate an iTunes specific deal that allows purchase of iTunes using Google Checkout, it seems like a win-win-win situation. iTunes can reduce transaction costs and Google can advance its Google Checkout program big time with a flagship mega-client like Apple plus make transaction revenue from Apple. If the program gains momentum with iTunes buyers (Apple/Google offer incentives to start?) , all parties win. For a buyer, using Google Checkout can only be a plus after overcoming some initial inertia. Google offers convenience for buyers similar to PayPal--Fraud protection, only one password and ID for all internet shopping and spam email filtering from merchants.

I don't know what Apple's current Adwords payments to Google are now but they must be substantial.

This makes a lot of sense to me. Does anyone see any holes in the concept?

[melgross]

Originally Posted by SpamSandwich

Yes, I made that same point recently, and I believe they're going to sign some really, really big acts to get the ball rolling.

I don't think so.

They may do the same kind of deal they just did out in Vegas, where they will "broadcast" an act from the stage, and carry in on iTunes, in concert with the casino, but that's not the same thing at all.

[Porchland]

Originally Posted by g5man

The problem arises when 80% of the songs are still purchased via CDs. Apple has great negotiating power for digital music, but trying to become a label is stretching it.

I agree, but that's not a problem. I said in my original post that Apple could farm out the CD rights. The point is: CDs will continue to lose share to digital downloads the same as tapes killed 8 tracks and DVDs killed VHS.

And Apple already produces a lot of original content like iTunes Originals that I assume they get much better margins on. I don't see starting a small label, developing a roster and maybe even signing a few high-profile acts as such a stretch.

[Porchland]

Originally Posted by ogun7

Unfortunately you really don't have a grasp of what record labels really do. They spend a tremendous amount of money marketing and developing talent. Pressing and distributing music is a peripheral business. Record companies get your video on MTV, your song on the radio and your face on the Late show. That takes a way different turn than posting music files on a website. In reality, Walmart, Amazon and Apple are music distributors.

At the end of the day, record labels make or lose money based on how many records they sell. The A&R and marketing is just the way they do it. If EMI, Warner, etc., had such a great business plan, they wouldn't be seeing double-digit annual declines in CD sales.

My point is that Apple has a lot of natural advantages over the labels for digital distribution of music. Some of that $.70 per track is going to A&R, production, promotion, etc., but Apple only needs to recoup $.10 of that to significantly increase its margins. If you assume that $.10 out of that $.70 is the label's profit, Apple is passing that profit to the labels that it could keep if it owned the label.

[melgross]

Originally Posted by Porchland

At the end of the day, record labels make or lose money based on how many records they sell. The A&R and marketing is just the way they do it. If EMI, Warner, etc., had such a great business plan, they wouldn't be seeing double-digit annual declines in CD sales.

My point is that Apple has a lot of natural advantages over the labels for digital distribution of music. Some of that $.70 per track is going to A&R, production, promotion, etc., but Apple only needs to recoup $.10 of that to significantly increase its margins. If you assume that $.10 out of that $.70 is the label's profit, Apple is passing that profit to the labels that it could keep if it owned the label.

You're underestimating what the labels do. It isn't just a matter of thinking that Apple could get 10 cents from every 70. It would be more like 3 cents these days.

The amount of effort expended would never be worth the payback, and headaches, as well as the bad publicity.

That would be in addition to the fact that all other media companies would also consider Apple to be a competitor in their own businesses, which they are not now.

I see only disadvantages from this, no advantages.

[tompage]

If Apple can make 10c out of 99c on an average US song sale, then its margins must be great on sales in the European and especially UK iTunes Stores. In the UK, we are charged 79p per track. With the dollar currently at over $2 to £1, 79p is $1.60, so Apple would be making 70c or over 40% margins. Margins in other European countries would be nearly 30% at current exchange rates

I know the European market is smaller than the US one, but these numbers must drag that 10% up significantly when you look at the global market.

Of course, I still agree with many other comments here, that whilist the numbers proposed in the article look broadly reasonable, there seems to be little real evidence as to their validity and the margin for error on the different elements that make up the calculation could mean that the real margin on US sales could probably be anywhere between 0% and 20%.

[jonessodarally]

Originally Posted by JeffDM

Apple does not have a tendency to have a broad spectrum in their products. I think it is very unlikely that they will offer 256 with some labels and 192 with others, whether or not it makes any audible difference between the two.



I don't understand why you say that, unless you are assuming variable bit rate will be used. Given that Apple generally uses constant bit rate in their iTunes audio files, you should be able to multiply the number of seconds by the bit rate and arrive at the file size in bits. Maybe the perceived audio might be the same, but one file should be almost exactly 33% larger than the other. If it's not, then something is probably wrong.

FWIW, I'm in the process of uploading some music to iTunes through TuneCore.com... they require 320 for the bit rate on everything. I thought that was interesting, since you can't download it at 320.

[Mr. H]

Originally Posted by tompage

If Apple can make 10c out of 99c on an average US song sale, then its margins must be great on sales in the European and especially UK iTunes Stores. In the UK, we are charged 79p per track. With the dollar currently at over $2 to £1, 79p is $1.60, so Apple would be making 70c or over 40% margins. Margins in other European countries would be nearly 30% at current exchange rates

Don't forget that the 79p includes 17.5% V.A.T., whilst the 99c in the U.S. doesn't include any sales tax. So you should compare 67p to 99c. Which, I'll grant you, still doesn't compare that well. Also, the label's wholesale prices may be higher in the U.K.

[multiplex]

"For each $0.99 song, we estimate that Apple pays $0.70 to major labels, which own over 85 percent of the market, and $0.60 to $0.65 to independent labels, which drives an average price per song of approximately $0.69," he explained. On top of that, of course, are Apple's network fees, transaction fees, and general administrative expenses associated with operating the iTunes Store. "

Just the credit card acceptance per song is much higher.

Example

Basic Discount Rate (Best Rate) 2%
Basic Transaction Fee With AVS .15¢

= .17¢ per song

That is just the start.

About 33% of credit cards are "Reward" cards, and have a higher rate, you can add another .2¢ for these.

=.19¢ per song


If the card holder is using a debit card, they fee can be slightly lower.

=.16¢ per song

Apple trys to cache asd many trasaction from each card holder as possiable to lower the actual transaction costs. For example if you order 3 songs in a week, you may get one invoce mailed to you with a single charge of .99*3 as the total charge that appears on your credit card. It is in Apples best interest to hold back the transactions if they think you may have more in that 7-10 cycle.


It is however very true that Apple's internal gift cards have a one time Disount rate and transaction fee when funds are first loaded to the gift card. All other deductions and transactions are free to apple. So the more gift card transactins for Apple, the more profit. They will also find income form the 1/3 of gift cards that are never redeemed. This can be worth millions in the next few years...

So the math in the story is really flawed in my estimate.


My experience? I have sold Merchant Accounts for 20 years and have direct knowledge of the Apple relationship.

+b

[lfe2211]

Originally Posted by multiplex

"For each $0.99 song, we estimate that Apple pays $0.70 to major labels, which own over 85 percent of the market, and $0.60 to $0.65 to independent labels, which drives an average price per song of approximately $0.69," he explained. On top of that, of course, are Apple's network fees, transaction fees, and general administrative expenses associated with operating the iTunes Store. "

Just the credit card acceptance per song is much higher.

Example

Basic Discount Rate (Best Rate) 2%
Basic Transaction Fee With AVS .15¢

= .17¢ per song

That is just the start.

About 33% of credit cards are "Reward" cards, and have a higher rate, you can add another .2¢ for these.

=.19¢ per song


If the card holder is using a debit card, they fee can be slightly lower.

=.16¢ per song

Apple trys to cache asd many trasaction from each card holder as possiable to lower the actual transaction costs. For example if you order 3 songs in a week, you may get one invoce mailed to you with a single charge of .99*3 as the total charge that appears on your credit card. It is in Apples best interest to hold back the transactions if they think you may have more in that 7-10 cycle.


It is however very true that Apple's internal gift cards have a one time Disount rate and transaction fee when funds are first loaded to the gift card. All other deductions and transactions are free to apple. So the more gift card transactins for Apple, the more profit. They will also find income form the 1/3 of gift cards that are never redeemed. This can be worth millions in the next few years...

So the math in the story is really flawed in my estimate.


My experience? I have sold Merchant Accounts for 20 years and have direct knowledge of the Apple relationship.

+b

Thanks for the good info Multiplex.

As an industry veteran, what do you think of my Google Checkout idea (post#29) ? Naive? Not so simple? Buyer reluctance? Great? I'd be interested in your opinion pro or con.

[multiplex]

Originally Posted by lfe2211

Thanks for the good info Multiplex.

As an industry veteran, what do you think of my Google Checkout idea (post#29) ? Naive? Not so simple? Buyer reluctance? Great? I'd be interested in your opinion pro or con.

This would have a major impact on Apple's profit and is an option as well as PayPal options. Up to this point Apple has avoided partnering in the Payment System area. But if the Google deal took place, I am sure it would require more then just the current Adwords income. This may be the hold back on this idea.

The plan fact is Visa and Mastercard was never created to be a "Micro" payment system. All rates set by Visa and Mastercard are paid by ALL companies. The only part that may be adjusted is the very slim margins of the Processing bank. It would be a less then a penny at best.

New payment platforms like Steve Case's GRATIS card offers a.50% Discount rate and may be another option.

[lfe2211]

Originally Posted by multiplex

This would have a major impact on Apple's profit and is an option as well as PayPal options. Up to this point Apple has avoided partnering in the Payment System area. But if the Google deal took place, I am sure it would require more then just the current Adwords income. This may be the hold back on this idea.

The plan fact is Visa and Mastercard was never created to be a "Micro" payment system. All rates set by Visa and Mastercard are paid by ALL companies. The only part that may be adjusted is the very slim margins of the Processing bank. It would be a less then a penny at best.

New payment platforms like Steve Case's GRATIS card offers a.50% Discount rate and may be another option.

Since my original post, I had further thoughts on the linkage with Google Checkout. Since the iTunes site draws so much traffic, it would be a good mechanism for Google via iTunes to introduce/direct consumers to their GC clients. So, the arrangement between Apple and Google (to reduce Apple transaction fees) could be tied into this directing of consumers to other GC clients not just Adwords. Apple and & Google are already very tight and looking for mechanisms to partner.