How Apple profits from the App Store
With the passing of the 1 billion download milestone, several efforts have been made to estimate what that means in dollar terms for Apple (AAPL).
They're well intentioned, but they miss the point.
The latest, published Wednesday by Lightspeed Venture Partner's Jeremy Liew, estimates that Apple, which takes 30 cents of every dollar spent on the App Store, has cleared somewhere between $20 million and $45 million since the store opened 10 months ago. Liew's calculation is based on the assumption that the ratio of free to paid apps is in the range of 15:1 to 40:1, and that the mean price per app is $2.65.
Three weeks earlier, Geek.com's Christian Zibreg performed a similar analysis using slightly different assumptions (notably a more optimistic 10:1 free-to-paid-app ratio) and calculated that Apple is currently collecting revenue at the rate of $300,000 a day — or $110 million a year. But he adds that the costs of running the store are unknown and could actually exceed Apple's share of the revenue.
Apple also collects revenue in the sale of iPhone developer licenses. As of March 17, Apple had signed up 50,000 individual and corporate developers. Individuals pay $99 for a license; enterprise memberships cost $299. Assuming that most developers pay $99, that's nearly $5 million billion in revenue for Apple.
But those membership fees are one-time-per-year payments, and they also have associated costs, including the cost of developing the SDK (software developers kit) and maintaining an extensive free library of guides, references, how-tos and sample code.
Even if there is money left over, and the sale of apps and developer licenses is generating a revenue stream for Apple, it's a trickle compared with the profits that are flooding in every quarter from what really matters to Cupertino: the sale of iPhones and iPod touches.
Apple booked $10.8 billion (non-GAAP) in fiscal 2008 from the sale of iPhones alone, and Piper Jaffray's Gene Munster estimates that it will book another $13 billion this year.
Steve Jobs said when he opened the App Store that it was designed to merely break even — and he probably meant it. The apps, which can increase the utility of a mobile device exponentially, are there to bring in users. The profit for Apple — as usual — is in the high-margin hardware.
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Analysts are so wrong about the earnings potential of apps. The IN APP model for gaming will be a big earnings boon to apple.
Ngmoco, the triailblazer, already has 20 million downloads. I bet there will be at least this many paying for IN APP gaming on adaily basis. Even if they spend a dollar a day, this is 20 million a day. To make it easier to compute, I wll use 21 million. 21 million multiplied by 300 days is 6.3 billion. Apple's share, 2.1 billion.
there are three key reasons why having a dominant standard builds winners. Exchange (think Facebook for one vs. Facebook for 200 million), complementary products & add- one that make your std more valuable, and switching costs created when customers invest in add-ons and are less likely to switch to rivals. IPhone wins big on 2 and 3! For more see network effects chapter at http://gallaugher.com/chapters
Yup, Apple got me hooked because of the iPhone. Next thing I know, mobileme, new MacBook Pro marking my switch from PC land and now pretty much entrenched as a Mac user. Now looking at a Mac desktop in the future. Apple got good money for that initial iPhone purchase. And I doubt I'd switch phone platforms because of my apps! Switch carriers, now that's a different story… c'mon LTE and verizon! 
http://news.cnet.com/8301-13579_3-10013232-37.html
"Jobs on iPhone apps: $30 million in 30 days"
So that means Apple made $9 million in profit the first month alone. Even if you assume revenues stayed absolutely flat, that's $81 million in profit for the first 9 months, or more than double what the idiotic analysis by Lightspeed Venture did.
Someone needs to call them out – their flaw is pulling a paid apps to free apps ratio out of their asses.
Apple does not sell itunes songs and shows to make profit. It sell them to increase sales of ipod's and make HUGE profit. Similarly it sells the apps because it gives the people another reason to buy the iphone on which it again makes huge profits. Apple is first and last a hardware company. It sells songs and apps just to sell more hardware which is a well known fact now
Isn't it great that we're still talking about Apple after all of these years! We need these guys to keep building great consumer products and raising the bar for everyone else (do you hear what I'm saying Microsoft?)
The value of the apps goes way beyond attracting new users to the device, it's keeps these customers with Apple long term. Users quickly get 'platformed in' on the apple mobile world once they establish and pay for their favorite apps. This becomes more important as other devices catch up to Apple on the hardware side and the 'latest release leapfrog' begins to inevitably occur. The next big benefit is that they've once entered the Apple ecosystem, the magic dust gets sprinkled on them. From there, the halo appears as they buy their next desktop, laptop, MacPad (soon!), and future digital living room purchases all from Apple. It truly is a great strategy that will drive earnings well beyond the current purchase.
"Steve Jobs said when he opened the App Store that it was designed to merely break even"
So no news here. End of discussion
IMHO, the App Store, the iPod, the iPhone, iTunes – all are principally designed as "bait" to attract new customers into those gorgeous Apple stores, where they come under the spell of those gorgeous computers.
THAT'S the method to Apple's madness!
Another advantage is attracting developers that then have less time or inclination to develop for another platform. Of course, alternate platform app stores can then compete by offering developers a bigger cut or better toolkit (good luck w/that), and suddenly, in a bad economy, there's competition for developers. Pretty cool for developers … like me.
This information is interesting, but the true value of the App Store is so much greater than $45 million. To wit:
• The App Store gives Apple a huge competitive advantage in the marketplace. To measure the advantage, simply look at competitors' reactions to it. They're all scrambling to launch their own app outlets.
• The App Store adds significantly to the Apple ecosystem. Macs, iPhones and iPods work together … or separately.
• By working in concert with iTunes, the App Store builds Apple's music and movie businesses further.
• The App Store builds consumer recognition of Apple as a serious gaming option. With gaming a larger industry than movies, Apple is on the verge of disrupting, reshaping and controlling yet another industry.
You have your ratios backwards. Free-to-paid would be in the ranges of 15:1, 40:1 and 10:1 according to the calculations cited in your article (not 1:15, 1:40 and 1:10).
ex ped: I believe you are right. I picked up the error from Lightspeed. Correcting now.
'In fact, Apple collects far more in the sale of developer licenses than it does from the sale of apps. As of March 17, Apple had signed up 50,000 individual and corporate developers. Individuals pay $99 for a license; enterprise memberships cost $299. Assume that most developers pay $99, that’s nearly $5 billion in revenue for Apple — more than 100 times Liew’s most optimistic estimate of its take from the App Store.'
I wish it were true, but 50,000 @ $99 is nearly $5 Million, not Billion.
50,000 developers * $99 is only 5 million, and not 5 billion as the article states. It's also not a one time fee, I just paid my $99 for the second year. My App isn't very popular but it made WAY more than the $200 they collected in dev license fees.
IS it clear that Developer licenses for the iPhone are one-time payments? The memberships (apparently) expire after a year — I don't know whether Apple plans on re-charging to renew or if expressing continued interest is sufficient to keep an account valid. No one's account has expired, yet.
I thought 50,000 times $99 was about $5M NOT $5B!!
ex ped: Right you are! And kudos for being the first to catch that error. I am a blogger of very little mind. Math fixed and post revised. Thanks.
Gameloft just reported that 13 percent of their revenues were from the iphone. this is equivalent to 23,800 per day just from one game shop.