Posted by: Marshall Sponder | August 11, 2008

ITunes – best business Apple Has – New York Times

I read the stories early this morning and made a note to myself to write about today – but when I tried, it didn’t seem as interesting and noteworthy until I read Saul Hansell‘s post at the New York Times The iTunes Store: Profit Machine which pretty much says the iPhone is where it’s at because of the software you can get on it.

“…The emergence of creative and useful software is putting the iPhone in a completely different class than any other cellphone. Laura Holson reported in the New York Times last week how applications are loosening the grip of the network carriers.”

The profitablility comes because it’s software that’s being delivered and everything ends up going through iTunes anyway:

“…Let’s compare the iTunes business to, the biggest online merchant of physical goods. Amazon’s gross profit is 24 percent of its sales. That represents the share of the sales it keeps after paying for the merchandise, credit card fees and shipping.

Compare that to iTunes: Assume Apple pays about 2 percent for credit card fees. That brings its 30 percent take down to about 28 percent. Apple, of course, doesn’t have any shipping fees. Yes, Apple does pay for the Internet bandwidth to deliver the applications, music and video it sells, but even so Apple’s gross margin is better than that of Amazon.

Apple’s net is even better. Amazon spends 37 percent of its gross profit on its warehouses and other costs of handling its merchandise, costs that Apple doesn’t have. And it spends another 11 percent of its gross profit on marketing. The iTunes store is built into to the software that iPod and iPhone owners must use, so Apple’s incremental marketing costs are rather low.”

Could it be that selling what is “virtual” rather than real – a piece of software – is more profitable than the real thing?  Yes.

One difference though – between Virtual Objects in Virtual Worlds and a piece of software that operates on real, 3D Physical device – an iPhone – is just that …. there’s a program, but it’s used in the real word; as it’s delivered by the internet, the cost is just about $0 to deliver it.

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  1. Thanks for sharing that! Nice post. I just glanced through it.

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