Apple's iTunes: Rapid Sales Acceleration

iTunes has long been looked at as the loss leader, the bridge that links Apple’s (AAPL) assorted media products. It drives product sales and helps power iPods, iPhones, Apple TV and Mac multimedia.  But that role of servitude hasn’t stopped it from turning into a significant force. 

Apple announced today that the iTunes store crossed the 5 billion song barrier.  That’s 5 billion songs sold, up a billion from the 4billion announced in January.   

At 99cents a song, that means the store has generated nearly $5billion in music revenue. That’s $3.5billion to artists and labels and $1.5billion to Apple (based on widely estimated revenue sharing splits).  That’s not too shabby for an auxiliary program that helps promote hardware sales.

As this graphic shows, the escalation in pace at which songs are selling isn’t bad either:

Even more impressive, however, might be the story surrounding video sales.  Despite a market in infant stages, despite a general lack of bridge connecting PC to TV (Apple TV notwithstanding), Apple said customers are still either renting or buying 50k movies a day from iTunes.  That translates to more than 18million movies distributed a year.    

In revenue, at an average purchase price of $12.50 (New titles are sold at $14.99 and library titles at 9.99) and a rental price of $3.49 (rentals are either $2.99 or $3.99).  The gross numbers start to add up: 

A 50/50 split of sales versus rentals, for example, yields $143.9m.  If it skews 75/25 in favor of sales, the revenue ratchets up to $187.9million.  Mix in TV sales, which aren’t included and have been doing better volume than movies, and you could add another $150 to $200m.   That totals much as $387m on the high side. 

To put that in perspective and lend a little color, Netflix (NFLX), a well established rental business catering to well entrenched and widely accepted technology (DVDs/DVD players) had  quarterly movie video rental revenue of $326.2m in April.  Apple’s potentially in reach of generating one fourth that revenue (per the same time period) in an infant market. That’s worth keeping an eye on.

Comments

[JB Money]

Nice review. The video sales number were very surprising and very encouraging. Apple continues to give user the experience they want and it shows in these numbers.

[Oh Blah DeeBlah Dah]

Your chart is poorly drawn. The "y" axis should show each billion song milestone, and the "x" axis should show the date at which each billion was reached.

Then, the chart would show a steepening, upward sloping curve with each billion milestone CLOSER to the previous milestone.

This would demonstrate that each billion milestone is occurring EARLIER than the previous milestone.

[Oh Blah DeeBlah Dah]

Your chart is poorly drawn. The "y" axis should show each billion song milestone, and the "x" axis should show the date at which each billion was reached.

Then, the chart would show a steepening, upward sloping curve with each billion milestone CLOSER to the previous milestone.

This would demonstrate that each billion milestone is occurring EARLIER than the previous milestone.

In other words, Apple has been consistently selling the next billion songs FASTER than the previous billion songs.

[sbjforever]

The future added ingredient here is Apple TV Games. I mean real people ones, sophisticated, insightful, challenging contests that are in our near future. Think of downloading one of those suckers for an evenings pleasure! And with box and software integrated into your widescreen TV. No lifting our that mess of boxes and cables to be strewn across the living room floor.

[Toni]

Stock is going down.

[Toni]

-3%

[JeremyElliott]

Toni. What's your point?

[digivision]

more Macs sold = more music sold
this should serve as a future indicator of how Mac sales are going
:-)

[PK deC'ville]

@"Toni"

Very funny!

[User 186090]

Toni, the ENTIRE market is going/went down.

[AAA]

Definitely a serious threat to Blockbuster and Netflix in the future.

[outsidethebox]

Apple should take their cash and buy Sprint. Yep, the whole company. Then they would own their own entire network AND have the hottest selling smartphone on the market. Lowball the service fees for both data and mobile minute packages across the country (because they are getting 100% of the revenue since they would own the company), and good Lord, the money would roll in and with no chance of anyone crying monopoly on that deal.

[kirasaw]

@ outsidethebox
Apple has about 20 billion in cash. While Sprit has a market cap of about 22.5 billion, which makes it sound like Apple could finance a take over, the truth is that Sprint has an enterprise value of over 43 billion. Enterprise Value is general the amount required to start a take over bid. So there is no way for Apple to buy Sprint. They would never spend all their cash an borrow 23 billion on top of that.

[UnitedStates ofGenerica]

@ outsidethebox

You realize there are other countries in the world outside the USA, right?

[mollytjm]

ok...we all know toni is a microsoft/pc guy who WANTS apple to fail and is trying very hard to accomplish that... the rest of us appreciate innovation and a company that provides actual service to it's customers...plus great products, minus the agonies of Vista! Apple will continue to grow at a huge rate. they have an enormous cash cushion and legions of smart people. June 11 can't come soon enough. i'm sure guys like toni dread the day.

[kdogz13]

With 5 billion songs sold - all of which can only be played on Apple's devices - at what point does this become anti-competitive? Customers will be stuck with Apple devices unless they choose to re-purchase songs/movies to use with a rival's device (a huge hurdle for rival devices to overcome).

[mollytjm]

consumers have a choice, kdogz13. a lot of them chose to buy ipods, knowing about itunes. they weren't 'stuck'. songs, videos, and games are available all over the place as are song, video and game playing technology. the fact that apple does it all so well is actually 'the huge hurdle for rival devices to overcome'. good luck.

[kdogz13]

Re: Mollytjm

Hey look - customers shouldn't be trapped for life because 5 years ago the iPod was better than other MP3 players.

A few years ago - the US Congress mandated that cell phone companies must allow users to keep their cell phone numbers when they switch to another company. The reason? Companies were using an anti-competitive hurdle (the burden of changing cell phone numbers) as a way to trap customers into staying with their company.

This is basic stuff - Apple is using the success of iPods (and music from iTunes) as a way to propel sales in iPhones - and as a disincentive to buy non-Apple products. This is the same type of monopolistic activity that Microsoft did a few years back...

[ND]

Apple uses a compression scheme which is superior to MP3 called AAC. I've seen non-Apple devices that can play it.

[User 186090]

@kdogz13

Apple was and still is REQUIRED by the record labels to provided DRM. Jobs has stated publicly that if the labels would let Apple sell their songs unlocked, they would.

Besides, Amazon now offers unlocked songs and so does iTunes for a minor premium. There are also programs and script codes to automatically strip the DRM from iTunes and other DRM'd songs. Apple's monopoly comes from quality, ease of use and design, not from anti-competative behaviour.

[mollytjm]

game playing technology mandates the use of that particular software. if you buy an intendo, you use their stuff. people can get their music or videos from many sources... the ones who CHOOSE to use Apple products, like the ipod, may also choose to use something else. this is not the same as microsoft making everyone use their browser at a time when there weren't many choices.
technology is moving faster than people realize. there will be more open platforms, everywhere. right now, innovation, tight controls by the music industry on it's licensing agreements with Apple, puts Apple ahead of the pack but also mandates some limits. Apple has a long way to go, and about 20 years worth dominance, to be in any monopoly ballpark with msf. if msf or anyone else can do better, it's an open competition.

[mtkoren]

I agree with Oh Blah Dee Blah Dah even before seeing that comment. My 1st impression of the chart was - oh what a mess - is it worth the effort that the writer of the article hadn't succeeded in to try to make sense of it? It really makes it difficult to discern any trends. I suggest an update with another chart.

[King Solomon]

thats not a very Jobs-like-graph. Have you learned nothing from his keynotes?!

[User 154984]

itunes is great cause it's user friendly, quick, and there's nothing out there even close to it (in my opinion)...however, it's very proprietory (and for good reason). Microsoft is taking advantage of their position... But my take is if you've purchased a tune you should be to upload to anything other than just an iphone, ipod...etc. I'm looking for the company to come along a make THAT happen!

[jmmx]

First - @kdogz13

Non one is stuck with iTunes songs. Simple burn a CD with the songs you want, then you can rip them back into iTunes or another program and use them on whatever MP3 player you want.

[Bugs]

Taking on Sprint's debt would be a bold move indeed. I like the idea for Apple. One of the more interesting idea's I've run across for M&A.

[eldernorm]

While Netflix may have had 340 million in a quarter for rentals, you have to figure in cost to buy the media and postage to ship to and fro and labor to sort both incoming and outgoing.

Once Apple puts a digital song online, it just rakes in the money. The only costs are the standard and constand cost of servers and bandwidth.