19% of software on Apple's App Store is paid, with $1.49 average price
The App Store offers great a value to consumers with 4 billion free applications downloaded to date, but it is not hugely profitable for Apple, as paid-for applications carry an average selling price of $1.49, according to a new analysis.
Gene Munster, Wall Street analyst with Piper Jaffray, released new facts and figures on the App Store for iOS devices -- the iPhone, iPod touch and iPad -- on Wednesday. He said that app pricing data suggests that 81 percent of downloaded applications (totaling 4 billion) are free, while the top 50 paid applications have an average selling price of $1.49.
Applications on the iPad are a bit more expensive, with the average selling price of the top 30 amounting to $4.66. Munster said he expects the cost of App Store software to skew higher as the mix shifts slightly toward the iPad, which sold more than 3 million units in its first 80 days.
The numbers also suggest that iPhone, iPod touch and iPad users download over 16.6 million applications every day, which is nearly double the 8.9 million daily download rate of music on iTunes.
Using a straight average selling price for both free and paid applications combined, Apple receives roughly 29 cents for every application downloaded, Munster said. He said the data implies the App Store has a gross margin of 44 percent.
Apple revealed earlier this month that the App Store has earned developers more than $1 billion since it opened in 2008. Munster said he believes that Apple has earned about $428 million in revenue since the launch of the App Store. The company takes a 30 percent cut of all sales, but must give 20 cents plus 2 percent to the credit card company and 1 percent for per app processing, leaving the company with a figure of $189 million in gross profit on paid apps alone.
"This does not factor in the roughly $81m Apple has spent since launch to deliver the 4b free apps that have been downloaded," he wrote.
The figures put into perspective what a small part of Apple's business the App Store is. A contribution of $189 million amounts to just 1 percent of the $33.7 billion in gross profit the Cupertino, Calif., company has earned since the App Store launched.
"Over the same time period, the iTunes store has generated $3.6b in revenue, to which the App Store has contributed $429m, or 12%," he said.
Of course, Apple has long admitted that the App Store is not hugely profitable for the company. Officials with Apple have said that neither the App Store or iTunes create much revenue for the company, running "a bit over break even," Chief Financial Officer Peter Oppenheimer said in January. But the App Store isn't meant to be a profit generator as much as a means to attracting customers to the iPhone, iPad and iPod touch.
Munster noted that the Piper Jaffray analysis does not factor the effect the App Store has on sales of devices running iOS, but he believes the sale of devices is driven by the availability of applications within the ecosystem.
"We see a virtuous cycle of Apple's robust app ecosystem adding features and functionality to the iOS devices, which drives sales, which makes the ecosystem more robust, which encourages more developers to write apps, and the cycle repeats itself," he said.
Gene Munster, Wall Street analyst with Piper Jaffray, released new facts and figures on the App Store for iOS devices -- the iPhone, iPod touch and iPad -- on Wednesday. He said that app pricing data suggests that 81 percent of downloaded applications (totaling 4 billion) are free, while the top 50 paid applications have an average selling price of $1.49.
Applications on the iPad are a bit more expensive, with the average selling price of the top 30 amounting to $4.66. Munster said he expects the cost of App Store software to skew higher as the mix shifts slightly toward the iPad, which sold more than 3 million units in its first 80 days.
The numbers also suggest that iPhone, iPod touch and iPad users download over 16.6 million applications every day, which is nearly double the 8.9 million daily download rate of music on iTunes.
Using a straight average selling price for both free and paid applications combined, Apple receives roughly 29 cents for every application downloaded, Munster said. He said the data implies the App Store has a gross margin of 44 percent.
Apple revealed earlier this month that the App Store has earned developers more than $1 billion since it opened in 2008. Munster said he believes that Apple has earned about $428 million in revenue since the launch of the App Store. The company takes a 30 percent cut of all sales, but must give 20 cents plus 2 percent to the credit card company and 1 percent for per app processing, leaving the company with a figure of $189 million in gross profit on paid apps alone.
"This does not factor in the roughly $81m Apple has spent since launch to deliver the 4b free apps that have been downloaded," he wrote.
The figures put into perspective what a small part of Apple's business the App Store is. A contribution of $189 million amounts to just 1 percent of the $33.7 billion in gross profit the Cupertino, Calif., company has earned since the App Store launched.
"Over the same time period, the iTunes store has generated $3.6b in revenue, to which the App Store has contributed $429m, or 12%," he said.
Of course, Apple has long admitted that the App Store is not hugely profitable for the company. Officials with Apple have said that neither the App Store or iTunes create much revenue for the company, running "a bit over break even," Chief Financial Officer Peter Oppenheimer said in January. But the App Store isn't meant to be a profit generator as much as a means to attracting customers to the iPhone, iPad and iPod touch.
Munster noted that the Piper Jaffray analysis does not factor the effect the App Store has on sales of devices running iOS, but he believes the sale of devices is driven by the availability of applications within the ecosystem.
"We see a virtuous cycle of Apple's robust app ecosystem adding features and functionality to the iOS devices, which drives sales, which makes the ecosystem more robust, which encourages more developers to write apps, and the cycle repeats itself," he said.
Comments
Gene should credit this report to his source material, "The Book of 'DUH!' (Chapter 8, Verses 12-18)"...
The App Store offers great a value to consumers with 4 billion free applications
"4 billion" applications?
Good analysis, but hardly surprising since this is exactly what Apple has been telling us at every quarterly conference call ("itunes store is designed break even or be slightly profitable," blah blah).
Gene should credit this report to his source material, "The Book of 'DUH!' (Chapter 8, Verses 12-18)"...
Yes, but this is the first time I've seen Apple's costs broken out. The one that most people forget is that Apple keeps 30% - but then has to pay the credit card processor. On these small transactions, that's a killer - HALF of Apple's revenue goes out to the credit card processor.
"4 billion" applications?
Yeah, the imprecisions and conflicting info in this report are bizarre. Basically, the headline is completely wrong.
He said the data implies the App Store has a gross margin of 44 percent.
Officials with Apple have said that ... the App Store ..., running "a bit over break even,"
Gross margin: 44 Percent.
That is, in Applespeak, "a bit over break-even".
Yes, but this is the first time I've seen Apple's costs broken out. The one that most people forget is that Apple keeps 30% - but then has to pay the credit card processor. On these small transactions, that's a killer - HALF of Apple's revenue goes out to the credit card processor.
I suspect that is so high because with credit cards you have interchange fee composed of two parts: a per transaction fee of about 10 cents with a percentage fee of 1 to 2% on the total (that may after tax
But the future projection of this model of marketing is where the real money will be made. Consider the upward profit projection due to Ipad apps added to mix, and apply to the Mac line (imagine computer applications as the logical extension), throw in a cloud computer and its potential services, and the margins look sweet.
I don't know how true this is.
How many cloud computing services make money at the moment? Salesforce.com is the only one I can think of. Nearly every other cloud computing service (including all of Google's) loses money and is running on the hopes and dreams of VCs.
Youtube, arguably the most successful cloud computing service, is still to turn a profit.
This is why it is so hard for others to compete as they look for profit based models whereas Apple see this as a marketing tool.
Yeah, but even as a marketing tool, they are NOT losing any money. Meanwhile, Microsoft is sinking massive amounts into various product lines (Zune, X-Box, MSN, Bing), hoping to some day break even, and then some day even longer into the future, begin making profit.
Apple will NOT release a product or service if it will not break even within a very short period of time. No wonder there's over $42B in the bank...
Yeah, but even as a marketing tool, they are NOT losing any money. Meanwhile, Microsoft is sinking massive amounts into various product lines (Zune, X-Box, MSN, Bing), hoping to some day break even, and then some day even longer into the future, begin making profit.
Apple will NOT release a product or service if it will not break even within a very short period of time. No wonder there's over $42B in the bank...
Oh, agreed. A marketing tool that doesn't only NOT lose money it helps propel massive profits in iPods, iPhones and Macs. Hence I said it is all about the eco system.
I suspect that is so high because with credit cards you have interchange fee composed of two parts: a per transaction fee of about 10 cents with a percentage fee of 1 to 2% on the total (that may after tax
Anyone that believes that Apple is paying those kind of fee for credit card transactions will probably go on fishing trip to the Gulf this summer.
As big as Apple is an the number of transactions they process per day throughout there entire operations, online store, retail stores, itunes music, itunes apps, etc etc they are not paying fees like that. I would not doubt that Apple has its own bankiing system in place to handle this. I would say there fees are only 1/3 or maybe as high as 1/2 of what a typical business would pay.
Gross margin: 44 Percent.
That is, in Applespeak, "a bit over break-even".
Considering that you have no idea what their overheads are, you're obviously clueless. Let me try once again to explain simple business 101.
Revenues - the amount of money received for a product or service. In this case, that would be Apple's 30% of the sale price (average $1.49 in this example).
Cost of sales - the direct cost of the item being sold. If it's a physical device, this is the component and material cost, direct labor cost, etc. Selling commissions are sometime included in cost of goods because they're tied to a specific product. When manufacturing overheads can be allocated (such as machine maintenance costs), they may be included, as well. In this case, the largest component of direct cost is credit card fees ($0.23 average). Also, processing costs of $0.02 are a direct cost. So, total cost of sales is $0.25
Gross margin is the amount of margin left after subtracting cost of sales from revenues. In this case, Apple's gross margin is $0.23 (44% of revenues).
Gross margin is not profit. Gross margin is the money you have left to pay the overheads. Things like R&D costs, administration, marketing, site overheads, etc. Overheads can be anywhere from a few percent of sales to 70 or 80% of sales, depending on the business.
Profit (also called net income) is what's left after you subtract the overheads from the gross margin. Since Apple is claiming that the apps store operates just over break-even, the overheads must be in the 40% range. There's nothing inconsistent in the facts being presented. The problem is that you're apparently completely lacking even basic business finance knowledge.
I'm pretty sure they could shut out Google if they moved onto 20/80 pricing
Another one who should stop commenting on things he doesn't understand.
Average selling price is $1.49. If Apple took 20%, that gives them $0.298 per sale. From that, they subtract the credit card costs ($0.23) and processing costs ($0.02) and would have less than $0.05 left to cover all their overheads. Based on the fact that Apple says they're only slightly above break-even even at 30%, that clearly is insufficient margin to do what you're suggesting.
Anyone that believes that Apple is paying those kind of fee for credit card transactions will probably go on fishing trip to the Gulf this summer.
As big as Apple is an the number of transactions they process per day throughout there entire operations, online store, retail stores, itunes music, itunes apps, etc etc they are not paying fees like that. I would not doubt that Apple has its own bankiing system in place to handle this. I would say there fees are only 1/3 or maybe as high as 1/2 of what a typical business would pay.
Best deal I can find on any credit card processing nets out at 1.8% fees on an average transaction size of $50,000. The only thing that saves Apple is that they combine several sales into one transaction whenever possible.
Throw in gift cards and the very small transaction sizes, and Apple is paying an ungodly sum to the credit card companies.
Not to mention iAd...Millions of devices capable of delivering Ads around the world...
Considering that you have no idea what their overheads are, you're obviously clueless. Let me try once again to explain simple business 101.
Revenues - the amount of money received for a product or service. In this case, that would be Apple's 30% of the sale price (average $1.49 in this example).
Cost of sales - the direct cost of the item being sold. If it's a physical device, this is the component and material cost, direct labor cost, etc. Selling commissions are sometime included in cost of goods because they're tied to a specific product. When manufacturing overheads can be allocated (such as machine maintenance costs), they may be included, as well. In this case, the largest component of direct cost is credit card fees ($0.23 average). Also, processing costs of $0.02 are a direct cost. So, total cost of sales is $0.25
Gross margin is the amount of margin left after subtracting cost of sales from revenues. In this case, Apple's gross margin is $0.23 (44% of revenues).
Gross margin is not profit. Gross margin is the money you have left to pay the overheads. Things like R&D costs, administration, marketing, site overheads, etc. Overheads can be anywhere from a few percent of sales to 70 or 80% of sales, depending on the business.
Profit (also called net income) is what's left after you subtract the overheads from the gross margin. Since Apple is claiming that the apps store operates just over break-even, the overheads must be in the 40% range. There's nothing inconsistent in the facts being presented. The problem is that you're apparently completely lacking even basic business finance knowledge.
Good job: this thread made it through 16 posts before resorting to wanton personal attacks. This may be a record for the AI forums.
That the AppStore is contributing 1% of total profit for a company that makes most of its money on hardware is not insignificant. The AppStore is far more profitable than many of the software products the company sells, definitely a strong ROI.
Moreover, it's a scalable investment: it's a content machine, the code is already written, so from this point on it can handle an ever-growing number of transactions with minimal enhancement investment, making its already high ROI higher and higher every month.
Don't be surprised if this software investment becomes 2% of gross profits by this time next year. And like I said, for a hardware company this is nothing to sneeze at.
Anyone that believes that Apple is paying those kind of fee for credit card transactions will probably go on fishing trip to the Gulf this summer.
As big as Apple is an the number of transactions they process per day throughout there entire operations, online store, retail stores, itunes music, itunes apps, etc etc they are not paying fees like that. I would not doubt that Apple has its own bankiing system in place to handle this. I would say there fees are only 1/3 or maybe as high as 1/2 of what a typical business would pay.
Best deal I can find on any credit card processing nets out at 1.8% fees on an average transaction size of $50,000. The only thing that saves Apple is that they combine several sales into one transaction whenever possible.
Throw in gift cards and the very small transaction sizes, and Apple is paying an ungodly sum to the credit card companies.
Typically, transaction fees for business are in a charge per transaction PLUS a percentage of the transaction price. For example, the credit card company we use is $0.20 per transaction plus 1.8% of the transaction amount. For big transactions, it's the percentage that matters. For small transactions, the fixed fee becomes important (which is why so many stores have a minimum credit card charge).
One would think that Apple could do better than my $0.20 plus 1.8%. I'm not so sure, though. The credit card company would assume that for most businesses, the transaction would be large enough to generate significant revenue. For the average iTunes transaction, the price is low enough that almost all of the revenue comes from the fixed 'per transaction' fee, so the credit card company may be less willing to budge than they would be if the average transaction is higher. I doubt if anyone outside of Apple or the credit card processor has any direct knowledge.