A closer look at the iTunes business
The common thought on the street is that Apple is clearly a hardware company from a revenues and profitability perspective, and that it uses three key elements of its ecosystem to drive attractiveness and appeal of its consumer hardware- they are the App Store, the iTunes Store and now the iBooks Store. These three storefronts help the company create a unique walled garden when it comes to a single cohesive point driving both customer purchase interest as well as subsequent stickiness to the iOS platform.
Much has been said about how spectacular the hardware growth has been, but to gain a better perspective of how this dovetails to the ecosystem commerce, its worth putting these numbers into charts.
Note: For the purposes of this analysis, I have left out Apple’s latest quarterly data (Q1-2012) so as to keep the comparisons on an annual level.
To start with, the slopes are what you would expect (sloping up), reflective of the rest of the corporate financials.
On the face of it, this is what you would expect. Apple over the years has expanded its content offerings to include TV shows, movies, applications, books and the likes. This has coincided with each new product category that they have announced beginning with the music only iPod to the iPhone to eventually the iPad.
But take a closer look at the per device purchases below (including and excluding Macs). This is paints a different picture altogether.
Since the lines are so similar, its safe to say that the contribution of Mac desktops and portables themselves are relatively minor in the larger scheme of things.
While this is a mighty simplistic way of putting it, the headlines that I see are one or more of the three below:
1. Apple’s ability to monetize its content on its handhelds is starting to see a gradual decline.
2. ………Or another way to look at it is that Apple’s content ecosystem is no longer a lucrative enough magnet to drive hardware sales growth.
3. Or…..no one cares, Apple has now reached a point where the appeal of its devices by themselves is adequate to drive sales.
Lets examine some of the reasons why we are seeing this phenomenon of declining revenue per device coming of Apple’s content ecosystem.
Apple recent sales are increasingly towards legacy users who are upgrading: This may be one reason. Clearly content bought is independent of device and meant to be kept across device upgrades. But the sheet growth in the year over year shipments indicate that there is clearly a fresh set of customers coming on board.
Apple now sees more iDevices per customer on an Average: Ah the fabled “halo” effect. But this is true…….ask anyone who has an iDevice if they have more than one piece of Apple hardware and the answer may well be positive- this completely eliminates the need for a user to duplicate purchases across his family of devices. For example a Mac user buying an iPad. Very likely, but then this again, Apple’s gravity defying growth slope does not account for all those new devices.
The average price of an iStore item is declining: I have no metrics to back this up, but its not implausible that App developers have had to reduce prices in the face of increasing competition. A corollary would be that there are many free apps that end up doing exactly what a paid app would do, and for many users, that is good enough. For content like songs, movies and videos, this explanation makes more sense as the value of each song/movie generally tends to peak at release and then slide down a gradual slope.
People are buying iDevices for more than just the content: The premise here is that the content ecosystem is a magnet for device purchases, but I know of plenty of people who have bought Apple devices without doing something as simple as creating a basic Apple ID. This may be the case for many emerging markets where people buy an iDevice for the sheer pride of owning one.
So there you go- there may be multiple reasons why Apple is seeing this phenomenon where its ability to monetize its content store seems to be seeing its first bump in the road. I am not trying to suggest that this is going to have a direct correlation on the state of growth of its overall business, but this is certainly moment for pause. One surrogate indicator that will probably help us delve deeper into this context is in understanding the emergence and proliferation of Apple IDs, and we will look at this deeper in a follow up post.
Update: As Horace notes in today’s post, these numbers are “recognized revenues” by Apple – the gross revenue numbers are skewed by the agency nature of the iTunes Store, where revenues recognized are a function of both content type as well as time.