Apple iTunes increases its profitability by securing good discounted deals with music producers and payment processing service.
iTunes may have become a lot more profitable for Apple since the service launched in 2003.
Apple iTunes has sold more than 2 Billion songs and is increasing at a steady rate. According to Pacific Crest Securities analyst, Andy Hargreaves, because of the increased sales and more number of users, Apple is able to secure profitable deals with record producers and payment processing company. Other companies, who also sell songs via the internet, won’t get such high profit margins.
For example, the per payment fees charged by credit card companies for every song has shrunk due to the large number of songs sold by Apple iTunes. Also, Apple has reduced these credit card fees by selling more gift cards, encouraging its user to have a larger transaction like purchasing the whole album or music set. It also charges the customers by grouping the transaction once a week rather than charging them every day.
Andy Hargreaves says previously iTunes was not able to generate much profit because of high credit processing costs. Since, then Apple’s operating profit margin on each song has increased to 10 cents per every song it sells. He makes the breakdown of the dollar song as follows:
• Wholesale cost (music): 69 cents.
• Network fees: 5 cents.
• Transaction fees: 10 cents.
• Operating expenses: 5 cents.
• Profit per song: 10 cents.
The profit margin will be higher for Movies and TV shows it sells, but they don’t sell as much as the song downloads.
Andy also believes Apple is planning a subscription music service similar to Real Rhapsody, Yahoo Music, and Napster Unlimited, which he expects the company will start soon by next year. The subscription charges are expected to cost between $10 to $15 per month.
Apple will launch iPhone this June and soon will release to other International markets, so this music launch service will be a big boost and their profitability will soar with more songs sold.