Apple Earns Less Than One Nickel For Every iTunes Song?

[Kent Pribbernow]

<div class='os_post_top_link'><a href='http://appleinsider.com/article.php?id=660' target='_blank'>http://appleinsider.com/article.php?id=660</a><br /><br /></div><i>"Record labels are demanding such a large cut from online music sales that several existing online music stores will eventually be forced to go under, The Independent cautions today. According to figures obtained by the publication, the labels are profiting more per digital sale than they would by selling the same music on CD."</i><br /><br />This is truly eye opening news! 8O I have often wondered what kind of profit margins Apple was getting from each $.99 track, but I expected it to be somewhere around 25%. Never did I imagine a mere four cents. If this information is true, it would take several hundred million song downloads before Apple, or any online music store would begin turning a handsome profit. Whether the report is true or not, it does shed some interesting and alarming insight into the margins that copyright holders get from these music downloads.

[attisb]

While I don't doubt that the music labels are taking a huge cut of the .99 cents. Apple has to be making more than 4 cents. The reason being is that they just launched a affiliate program and they give you 4-5 cents. Apple has to make at least that much if not more to allow an affiliate program to run.

[zrock]

Apple pays independent artists who use cdbaby for distribution 65 cents per song or $6.50 per full-album. Payment to the publisher (if the publishing rights are owned by someone else) is then paid by the artists out of their 65 cent cut, etc. The article mentions that publishers are getting 8 cents per song - my understanding is that this 8 cents is included in the 65 cent payout to independent artists.

So, for a 99 cent song, Apple pays out 65 cents to cover artist and publishing royalties, leaving a gross profit of 34 cents. With the recently introduced iTunes affiliate program, Apple pays 5% to the affiliate-roughly 5 cents per song or $0.50 per album. But, the commission only applies for purchases within a 24 hour "session" after an affiliate click, and no commission is paid when people purchase directly from the iTunes interface (without having clicked an affiliate link in the past 24 hours).

Of course, the "deal" with the major labels could be vastly different than the 65 cent per song / $6.50 per full-album, but iTunes is moving a ton of independent music. But, if the major label deals are in the same ballpark, Apple keeping 34 cents per song could result in a profit margin in the range of your expectation. Even if the 8 cents royalty is something different than mentioned above in cdbaby example and comes out of the Apple cut, it still leaves a gross profit of 26 cents per song.

Keep in mind, though "entertainment accounting" often varies from "traditional accounting" - i.e. many movies and music projects never realize a "profit" due to the accounting methods. So, depending on how you look at it, Apple could be making only 4 cents per song, losing 1 cent per song sold by affiliates (if the affiliate program wasn't included in the article's stats), or perhaps even making your expected 25 cents per song if the labels are subsidizing most of the iTunes marketing costs.

(edited to correct minor typos)

[James Fee]

It just proves what I've been saying all along.

Its about selling iPods. There is no incentive to open up iTunes to other players.

[Felix Torres]

For what its worth, Napster makes ten cents a song on d/l's.
Public info, especially now that they've divested the Roxio division.

Blaming the studios is meaningless; plenty of businesses survive on 4% or less margins.

Of course, Apple generally sneers at any business where they can't make 40% margin...

[Mojo Jojo]

So what is it?

Apple is the loss leader of legal downloads, they break even, or they make 25% of the sale for songs? It seems that reporting + Apple = FUD. Oh by the way, there going to be out of business by next year (claim heard since 1980). Sorry... just in a ranting mood today.

[James Fee]

Of course, Apple generally sneers at any business where they can't make 40% margin...
Well combine iTunes with the iPod and I'm sure they are close. You can't remove one from the other.

[dean_shan]

It just proves what I've been saying all along.

Its about selling iPods. There is no incentive to open up iTunes to other players.

I think I read a quote from Jobs himself say somthing to that amount.