Fun With The Forrester Report and My Calculator

I click on Comments and DON'T SEE ANY.

>I click on Comments and DON'T SEE ANY.

You were the first commenter is all.

"Those fees, are something that Forrester is worried about."

You know, I hate to pick nits, but what is that comma doing in there? Blogs are one thing, but when writing in Business Week starts to look like a blog by an amateur writer I really have to scratch my head and wonder.

Spell-check is your friend.

It's difficult to say how much Apple is charged for per credit card transaction. I think in general for Visa and Mastercard it's about 1.5% and 3% for American Express (which is why not many places take it). I'd be surprised if they were paying more than 6 cents per transaction in fees unless they're really getting ripped off. Even that seems high for what people I know who own businesses are charged for credit card transactions. That would leave 23 cents per 99 cent download to cover other costs and for profit. With how small the digital market is compared to physical sales there's a long long way for them to grow. You're not likely to see much of a jump until the iPhone really gets going. Assuming they don't mess it up and you can access the iTunes store from anywhere, that's where they'll make the real money on digital music sales. It'll be tough to say how much resistance there will be from labels on this considering that they can currently sell the same person both a digital music file and a ringtone (often for more money than the song itself). If the iPhone can use any of your files as a ringtone that will cut a big chunk from label's potential sales. You'll probably see the RIAA backers complain about this and try to increase the price of downloads or add another DRM mechanism so only some songs can be used as ringtones.

20 songs per ipod sold ahah thank you apple for boosting piracy. I have a 20gb ipod with 99% pirated music muahah

Great, the first three comments are about comments and are not actually comments.

"This is the dirty little secret about the iTunes Store: As good as it is, it makes Apple very little money. It is, for all intents and purposes, a marketing tool for the iPod profit machine."

True. While that may not sound like very good news for the guy managing the iTunes Store at Apple, it bodes very well for the company.

To me, this is solid strategy. This is the value add. You say it yourself... "In fiscal 2006 Apple moved 39 million iPods for about $7.7 billion in revenue, and in my estimation about $3 billion and change in gross profit."

The e-business model was always meant to be a supplement when it came to companies like Apple. Their product [the iPod] reeks class and kicks ass when it comes to the competition. If the iTunes store sells more iPods, then i dont care if they actually lose money on the store... as you've rightly pointed out, the amounts will be negligible from the accounts perspective.

But here's what Apple should really be worried about... DRM... [and a non-related point... Zune's wifi capabilities...] at some point, the store will turn regressive... the store will become the reason people DONT buy iPods. there are some serious issues that need sorting out on that end if this model needs to work... i wouldnt worry about companies like forrester or what they have to say

Apple is NOT paying a few cents from each $99 track to the processing company, a few cents to Visa or MC or AMEX, and a few cents to the issuing bank. It is paying a few cents that is split amongst ALL of those places together. I have a small eCommerce/phone order/mail order business that does a few hundred K$ a year -- ie, I do not have anywhere near the negotiating power Apple has on my discount rate and fees I pay for credit card processing, and I only pay about 2.35-2.4% TOTAL for Visa/MC and 3.5% for AMEX, plus $0.05 a transaction (Apple will lump things together to reduce the per transaction fee). On a $0.99 purchase, I would bet Apple is paying no more than 2-5 cents including transaction fee per track sold in processing fees and discount rates.

Also, I seem to remember a breakdown on who gets what from iTunes. The labels were getting around 71 cents and I think the pittance the artists actually get came from that, but Apple had 20-28 cents per song, which of course they have to subtract the costs of doing business -- the few pennies in credit card processing, any "commissions" they pay to retailers to sell gift cards, etc, bandwidth and data storage, etc etc etc. This was detailed back when iTunes was pretty new and can probably be found in Google.

I think the media jumped the gun on this report. Some articles were declaring iTunes "dead." Does the media has an agenda against Apple/iPod/iTunes? A month ago all I read was buzz for the so-called-iPod-killer Zune. Which turned out to be a piece of crap. Why the media is rooting for Apple to fail?

Wow, if your article is going to interpret everything in favour of Apple, why even bother.

iTunes is losing money, and all the Apple bulls say don't worry bout it. 20 songs per iPod, and the realization that iTunes will not be the end-all be-all for digitial distribution, are realities you should really try to absorb.

Journalists should not wear their biases on their sleeve.

Whooops!!!! I believe you've made an elementary and somewhat embarrassing mistake.

Not as bad as the publicity hound Forrester sending off data with one side of their mouth while saying that the statistics backing their data weren't really valid

Not as bad as the media, which is practically functionally illiterate in most regards, and certainly in reading anything requiring more than 3rd grade arithmetic.

Even a mundane psycological or sociological study is never sent to a publisher by a research who knows that his statistics and sampling procedures do not "justify" publication. And if that is done, then the reviewers at the publications, who actually READ the studies before publishing them, return the study as not been justified statistically. But why would a member of the esteemed media [or whoever the hell The Register is] actually take the time to READ the study they are "summarizing" or why would they have more than a grade school education availalbe as a basis for getting a job as a "reporter".

But you, sir, have mistaken "REVENUES" [and/or SALES"] with profits. Apple's figures pretty clearly indicate that they sell about 70 million iTunes per month for the past 14 months. Their REVENUE is simply the average price per tune multiplied by 70 million. Clearly, it is no secret that the 95-99% of purchases are for 99 cents. So we can immediately see that their quarterly REVENUES from iTunes [NOT PROFITS] per quarter are approx 3 months X 70 million times $1.00---equal to approximately $210 or close to half of their "miscellaneous quarterly revenues." So what is the mystery, here? I mean, really, can't we all see within 10%, give or take, that Apple takes in around $210 in iTunes revenues [and likely close to zero profit] per quarter. Can't we go on to getting rid of simpletons like the Forrester guy and restoring some integrity to the so called "Media" [note no longer called "Press" because reading and writing are no longer involved in their job description]

I think you are using this opportunity of infinitesimal doubt about Apples' iTunes REVENUES to mildly BASH Apple so as to distract and help cover for this exceedingly foolish Forrester fellow.

Sincerely,
Dana Maryla
Westport, CT 06880

``Apple takes home a dime a download, and then assume Apple were to sell 10 billion songs in a year: That would equate to a cool $1 billion in revenue or about 5% of fiscal 2006 sales.``

You mean profits, not revenue. You're contrasting profits to total sales. If they sell 10 billion songs, they bring in 10 (well, 9.99) bil in revenue, or $1 bil in Profit. So it's only 1/3 of the profit they get from selling iPods. Which still seems plenty good to me.

Also, it is extremely unlikely they're paying more than 6% for the credit card transaction based on their volume. And their costs to electronically transfer the files to the customer are extremely low (I can't imagine it costing more than a penny per song). The rightholders get a but under 70 cents per track, it's been publicly disclosed, so your best case 20 cents profit per track seems quite reasonable.

20% profit margin is nothing like Apple gets on its hardware (especially computers), but it's nothing to sneeze at either.

I thought this was supposed to be a business magazine?? Why are you trying to relate Apple's GM from one business unit against its total sales? At $1 per download, and assuming 10 billion downloads that is a total SALES number of $10 Billion....or approximately 50% of fiscal 2006. There is a high cost of this product whicih means that they may only take home 5-10% of the sales value as a profit. To me it looks as though they are doing approx. $400-450M of sales per quarter; $1.6-1.8B annually; if you figure 5-10% profit margin you get $80-$180M of profit. Seriously, am I missing something??

The amount of money that Apple makes with iTunes is indeed a red herring, but Apple needs the iTunes to be successful, and it wants the movie and music industry to understand that it can be a profitable sales channel for them. The Forrester Report, whether willingfully or not, challenged this view: it provided a different viewpoint that threatened the iTunes's brand name. And for a short period, Apple shares dropped as the market realized Apple might be losing leverage in negotiations with the movie and music industry, which is essential for the success of Apple's products.

As it turned out, closer examination of the Forrester Report shows that it was based on very weak data. From a population of millions of iTunes customers, the report considered only 181 of them, a statistically insignificant sample. Mathematically, this means that the data are not much better than coin tosses and so there is not much foundation to support any findings. The market came to realize this fact after a day, and the stock price corrected to what it was before the news: the report was dismissed in its entirety.

I speculate that the initial reaction to the report was based on trust that the underlying analysis was reasonable: investors often prefer to react quickly to news than to lose their time advantage by analyzing in depth all the information and disclaimers, particularly in times when disclaimers are just shields against lawsuits. This is particularly true if the source of information is believed to be credible. In the future, I suspect that reports from Forrester will be read more carefully, that is, if they are read at all---investors are not forgiving in matters of money.

Your theory that Apple had "...39 million iPods for about $7.7 billion in revenue, and in my estimation about $3 billion and change in gross profit" is neglecting the fact that even if ALL difference from cost of parts to final price would be profit it will still be less than 40% - but from that 5% is probably taken by credit card fees and probably another 5% by other selling/shipping related costs (and we will not even go to the warranty and nano scratching costs :) ). Also some of the 39 mil. might not be actually sold but instead simply moving into the distribution channel, and already seeing those as profits is a very dangerous bet from Apple ...

The genius of iTunes is that it was the necessary accelerator for iPod sales. For iPod to be highly successful, owners needed a cheap easy way to fill it with tunes. There was only one way to quickly and cheaply do it - download...and only one price would work - 99 cents.

At 99 cents there never was going to be any significant margin for Apple. Their piece of the profit would certainly be after recording studios, artists and credit card companies. Apple simply made all of the rest of the equation work and in the process gave up all or most gross margin on the iTune sales in return for huge iPod sales.

Could they admit this and be successful from the start? Would analysts and media allow them to admit this? I think you know the answer.

CWR
(retired CFO, NASDAQ Company)

This is not a dirty little secret. The fact that the iTS makes little money has been noted by Apple/Jobs and known in the industry since the store was introduced.

So where's the beef? Or better yet what news is this and who cares? What dirty secret? EVERYONE knows that they are not making jack on music sales. The download volume on the whole is up, if apple is making lots of money on iPods and more and more media outlets are releasing content on iTunes then Apple's promo machine is working perfectly. It may well be a loss leader already. This is common retail practice, and is sound business. Even if Apple has to pay $100 million a year to keep it open and make their $4 billion on supported sales no one would say that they are wasting money. So the point of the analysis? Are iPod sales mirroring the "collapse"? Is it "over" for iPods and mp3 or video players as a whole? In the US or worldwide? Is there some indication that some other company is going to overtake Apple in losing money on music downloads? Well M$ will, that we can be sure of, but seriously Forrester's speil and now your clarification of it tells us pretty much nothing. By my calculator, Forrester's own numbers in other studies indicate 70 million "online" households in the US, so the sample of 2700 is less than .004%. This is junk analysis and junk news.

Interesting this at first false information comes out when it does then this backhanded article. WHO for a minute thought Apple was making realy money on music sales? As the article pointed out they only charge $.99/song. So this clever article deduces that the music store is a marketing tool. So be it. BUT if it is stricktly a marketing tool it's one of the best there is. The ipod has boosted profits enormously and making converts of the steadfast pc crowd. Having a marketing tool that pays for itself AND skyrockets sales is a good thing. I think the jackals at Microsoft are back on the disinformation wagon. How come no one recalls when pcs first became affordable and ALL the stores not only and illegally refuse to sell Apples but was instructed by Microsoft to tell flat out lies about iMacs. Namely "you can't buy any software for an iMac" was the most prominent one. With Zune out and quckly becomming a failure due to incessant greed from the big M someone decided to run a false article, a lie. I'm surprised that the original author also didn't note that after he blamed the media he didn't come out with the "I have an alcohol problem" excuse.

The real genius of the Ipod is how it has recycled the old Walkman phenomenon from 25 years ago with new defective technology.

I hope these idiots lose money

Precisely because iTunes loses money, no other competitor can threaten by building a better, profitible, stand-alone music store business.

It's a great barrier to entry that the established king of the hill is a money-loser.

Seems suspicious that this report would come out as the Zune arrives at market, doesn't it?

Makes you go "Hmmmm..."

A lot of very good criticisms of the original analysis have been posted here. One, that keeps being repeated, is totally incorrect -- the idea that because a sample of data is from a small or miniscule portion of the universe, it is useless for analysis. The calculations showing that the sample is only 0.004% of the universe is totally meaningless - if the sample was collected randomly. A random sample of 2700 will be accurate within 2% for most measures. Companies make billion dollar decisions based on data like this every day. If this did not work, they wouldn't be doing it. There may be a lot of problems with the Forrester data and analysis but the ratio of the sample size to the universe size is not one of them.

Don't believe all this crap. This nothing more than fiction. If you have been keeping track of the media about iTunes, iPod and Zune you will see clearly that this is nothing more than attempt to shake an apple from the tree.
The media is influenced by money so, Microsoft takes is money dangles it in front of the media guys like a carrot then offers up PR BS about Zune taking over and Apple's iPod and iTunes taking a death leap! Really! Do some research and you shall see that I am right. Zune is no where close to taking the market share, Apple will make its money somehow and the media guys win no matter the outcome cause all they gota do is lie and suckers like us blieve this shit they call news! I don't have an iPod nor a Zune. I would be more likely to use iTunes and an iPod before I would buy a Zune and I think lots of people feel that way. That is just my opinion.

Any marketing tool that provides a profit, no matter how negligible, is better than 99% of the marketing tools in existence. I also don't see how movie/tv studios would deny the success of itunes. Music companies are making ~70 cents a track off of these downloads. I would wager that this is reasonably close to margins that would be made off of cd sales, but still gives their customers the added benefit of being able to shop at home and recieve their merchandise instantly. Any reductions in margin that labels receive need to be chalked up to the fact that the market has changed. These companies raped our wallets for years. With itunes, they were given a venture still profitable for them that allowed them to automatically adapt to the new market while only costing them a marginal percent.

>>Precisely because iTunes loses money, no other competitor can threaten by building a better, profitible, stand-alone music store business.

It's a great barrier to entry that the established king of the hill is a money-loser.

Genius!

Heck Ramsey those coma things "word" are there to show that the author has quoted somebody else that has said that sentence before.

No other download service has been as successful at wooing the major labels. Kudos to Apple as their knight in shining armor for pulling off the impossible... making it cooler to buy music online than to steal it.

iTunes sells iPods, not the other way around. As long as Apple isn't losing money on iTunes (they aren't), it's doing what it's supposed to do. Anything else anyone has to say is completely irrelevant. Had Apple wanted to ensure more iTunes sales, they would not have made it so easy to import music into iTunes from CD's and MP3s. If they're making money from iTunes it's just a bonus.

If Apple is making money on the iTunes store, it should reconsider. The whole point of iTunes is that Apple can provide the most efficient distribution channel to the media producers because, unlike competitors who do not drive massively profitable hardware sales, it is not required to make money from content distribution itself.

Thus, content creators can get something close to the theoretical maximum revenue from Apple, the strongest possible argument for making their content available through iTunes.

Since content creators can collect close to the theoretical maximum from a distribution channel that is not required to be profitable, they will tend to distribute through that channel knowing it is the best deal possible. This means that the unprofitable channel has the best hope of aggregating the most content which, in turn, attracts more customers, reduces costs, and drives more hardware.

These powerful self-reinforcing principles will not operate in a circumstance in which the distribution channel is expected to produce significant profits of its own. This is why, if Apple is making money, it should reconsider. But they know that...

From the beginning everyone knew Apple wasn't making big money on iTunes. That's far from a "dirty little secret".
Also these numbers are too dependent on ipods sold. Even though 70 million iPods have been sold they are not all still functioning or many are second ipods using the same iTunes account for the same person.
Evry one I know is buying off of iTunes. The numbers I see from news resources don't reflect the actual sales I see from personal purchases or family.
These numbers can be skewed in any way that promotes the authors intent (ie. sales are falling, sales are up, iTunes is dying, etc.)