Analyst: Apple is Taking a Substantial Profit From This Service

Apple (NASDAQ:AAPL) analyst Horace Dediu, has performed an interesting and thorough cost-analysis of Apple’s iTunes Store that demonstrates Apple’s “break-even” venture is actually collecting a tidy profit. Horace Dediu runs the Asymco news blog which, per the website, “covers the mobile industry with a heavy slant towards Apple’s business strategy and predictions of their financials.” Dediu estimates that the iTunes Store is clearing $2 billion in annual revenue.

Although Apple originally intended the iTunes Store to run as a “break-even” operation that would primarily function as a peripheral music service for customers buying the high-profit iPod, today it accounts for 60 percent of the $5.6 billion digital music retail market, reports MacNN.

As Dediu points out, the “economies of scale” alone start to create the potential for profit since the break-even cost for iTunes at this point would have to be $3.75 billion. “It’s hard to imagine this level of operational expense for digital content,” states Dediu.

Dediu notes that even Apple management has admitted that “the App Store is run ‘a little over break-even.’” He further notes that an estimated 2 percent profit margin on third-party apps and a 1 percent margin on music add “$150 million in margin content.” Apple takes a 30 percent distribution fee from third-party app sales.