Asymco’s Horace Dediu has estimated that Apple’s iTunes business, initially intended only to cover its costs as a way of driving hardware sales, now earns the company annual profits of a cool $2 billion.

itunes

What started as just a music store now sells music, video, books, iOS software, and Mac software. Revenues have grown five-fold in 7 years, with total sales approaching $5 billion a quarter and notching up an estimated 23 billion transactions a year.

Despite these heady numbers, Asymco believes Apple’s margins on most sales are almost non-existent: just 2 percent on apps and a wafer-thin 1 percent on music. Where Dediu thinks things are different is in the blue area termed ‘Apple Software’ that covers all the Mac software the company sells.

  • iWork, which includes Pages, Numbers and Keynote ($20 each)
  • iLife, which includes iMovie, iTunes, iPhoto, GarageBand (free with new computers but otherwise $15 each)
  • OS X updates (typically $19.99)
  • OS products including downloads of iOS and OS X. These are mostly free but some OS X updates are not free (typically $19.99 for new version Professional software, including Final Cut Pro ($299.99), Logic Pro ($199.99), Aperture ($79.99), Compressor ($49.99) and Motion ($49.99)
  • Apple Remote Desktop ($79.99)

If margins here are in line with industry norms of 50 percent, that means Apple makes $1.8 billion a year. Add in the tiny margins from the much higher total sales of other categories, and that gets you to the $2 billion figure. Not bad for a break-even business.

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