A closer look at the estimated $1.3 billion operating costs of iTunes

New reports are out that are using the numbers given at WWDC and some passing comments by Apple to give a rough estimate of operating costs for iTunes. The number going around is $1.3 billion per year just to run iTunes, the App Store, and iBookstore. But, those numbers are estimates based on incomplete data, and supported by a comment from Apple that is by no means definitive.

The numbers

According to Apple's numbers given at WWDC, iTunes has served up 15 billion song downloads, 130 million book downloads, and 14 billion app downloads. All of those numbers are huge, but need to be put into context of course. iTunes opened up for music sales in April 2003, so that's 15 billion song downloads in a bit over 8 years. Meanwhile, the App Store has been active for just under 3 years and has hit 14 billion app downloads. And, of course all of these numbers are downloads, not purchases. All of that to say that iTunes does a lot of business. The storage space and servers needed for all of the music, video, books and apps available in the store are one thing, but the bandwidth is another thing completely.

The task of calculating operating costs for iTunes was a complex process done by Horace Dediu at Asymco. What he did was used Apple's released download estimates and combined that with average song cost and average cost of apps to determine the content margins for songs and apps, which is what Apple would keep after paying developers or music labels. Dediu puts the monthly iTunes income at $313 million, and monthly content margin of $113 million. Dediu then extrapolates from comments by Apple that iTunes runs at break even, so assuming that all of the monthly content margin is put back into operating costs, which leads to the figure of $1.3 billion annually.

The missing factors

The trouble with those calculations are that they don't take into account two big things: books and video. iBooks and video may not add much revenue compared to music and apps, but the storage and bandwidth needed for video can quickly overtake music just because of the size of files. Unfortunately, Apple didn't release numbers for TV shows and movies at this year's WWDC. As of last year, the total downloads for TV shows stood at 450 million TV episodes and 100 million movies. So, even if the video service is far smaller in number of downloads, that could potentially add a lot to operating costs. Apple's own support page estimates that while a 4 minute song is about 4 MB, a 45 minute TV show is 200 MB for standard def and 600 MB for HD, and a 2-hour movie is 1-1.5 GB for SD and 3-4.5 GB for HD. That's a lot of data to be stored and processed.

The other trouble with the calculations is that they are based on comments by Apple that iTunes runs at "just above break even". Using this statement, Dediu assumes that all of the potential content margin is put towards operating costs. But, there is no real reason to believe Apple's statement on the matter. Apple has been known to gloss over revenue numbers, especially when they pertain to margins. iPhones notoriously pull a higher product margin than any other handset on the market, and that's by a big amount. Apple's vertical integration in production, and closed systems allow them to tightly control costs throughout their product lines. Apple is also known to make special deals with certain content providers which could change the numbers. Overall, Dediu is using incomplete numbers and an unverifiable claim about the operating costs of iTunes.

If we really look at the numbers that Dediu comes up with, they don't really mean anything. Adding in iBook sales and video sales adds revenue to the iTunes ecosystem, which changes the numbers if we do assume Apple's claims. And, as far as operating costs, video alone adds a huge burden as far as storage, bandwidth and processing. Combine that with the assumption that all revenue is put back into operating costs, a claim which can't be verified, and you get numbers that are impressive and sound good, but may not be anywhere near accurate. To be sure, Apple spends a huge amount of money operating iTunes, and maybe we'll see the numbers on that some day. But, these are not those numbers.

source: Asymco for iTunes cost estimates & Apple for content file sizes