Apple: App Store Runs Just Above Break Even

| Apple Stock Watch

CUPERTINO - Apple runs its popular App Store for iOS mobile apps just above the breakeven mark, according to Apple CFO Peter Oppenheimer. Mr. Oppenheimer made the announcement during today’s Apple shareholder meeting — one of the few revelations unveiled during the event — in response to a question about the company’s iOS subscription plan for newspapers and magazines .

The question came from an Apple shareholder late in the question and answer section of the meeting from a shareholder asking the three execs on stage for the event — COO Tim Cook, Marketing VP Phil Schiller, and CFO Peter Oppenheimer — about rumors that the next iterations of the iPad and iPhone were delayed, and about the controversy over the 30% Apple was taking from iOS subscriptions.

The first question was largely dismissed, as most long-term Apple watchers would have guessed, but it did provide Tim Cook the opportunity to make a quip concerning the March 2nd iPad media event that was announced earlier in the day.

“You may want to fire up a browser,” Mr. Cook said with a laugh, “and check the news on the media event [we announced today]. That may give you some clues.”

The second question, however, yielded one of the few new pieces of Apple information from the entire meeting. Phil Schiller fielded the question about the company’s subscription plans, making the case that Apple wasn’t asking for a cut of revenues from subscribers brought to the iPad by publishers outside of their iOS apps, and that Apple only wanted a cut from new customers brought to subscriptions from in-app purchases using Apple’s iOS infrastructure.

That, in turn, lead to Tim Cook making the case that free apps are a big part of the iOS app store ecosystem, and that Apple supports those apps — many of which make developers money in indirect ways — in order to support the broader iOS platform as a whole.

At that point, Peter Oppenheimer added, “We run the App Store just a little over breakeven,” implicitly making the case that the App Store was not a big profit generator for the company.

*In the interest of full disclosure, the author holds a small share in AAPL stock that was not an influence in the creation of this article.

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Comments

Nemo

Now, that is what I call a rapacious monopoly, running at just above breakeven.  So what to do publishers want, for to Apple run the App Store at a loss to subsidize their profit making publications/apps?  Apple is already supporting free apps out its revenues from the App Store.  To avoid being called evil Apple must, according to the likes of Time Warner, Sony, Amazon, and others of their ilk, run the App Store at a loss to subsidize Time Warner?  Or Sony? Or Amazon? Or any other subscription fee app?  Please!!!

b0wz3r

To avoid being called evil Apple must, according to the likes of Time Warner, Sony, Amazon, and others of their ilk, run the App Store at a loss to subsidize Time Warner?? Or Sony? Or Amazon?

Yup, that’s what they think.  At the very least that’s the position they’re taking because they’re so unwilling to change their business model with the times and technology.  They’re grasping at straws to hold on to whatever income they can despite the fact that it’s clear to everyone except those who work in the paper publishing industry, that they’re dinosaurs whose time has come.

Oh, and you forgot to add the RIAA to the list.

Lancashire-Witch

The second question, however, yielded one of the few new pieces of Apple information from the entire meeting.

Sir John Harvey Jones once remarked that it was surprising how few questions asked at (shareholder) meetings relate to business performance or decisions taken by the Board.
http://www.answers.com/topic/john-harvey-jones

If you want hard facts you have to ask the right questions.

webjprgm

Might it be the in-depth app review process costing Apple so much that they have to run at the break-even point?  I’m sure that can’t be cheap to hire all those people to painstakingly review all those apps ?

? and I suppose all the free apps add to platform costs too.  So paid app developers are paying for free app developers to use the platform?


The issue with subscription plans is that they force publishers to offer the same deals in-app.  Apple needs a way to make sure publishers don’t use Apple’s subscription platform as a freebie by doing all payment through their own systems, but these exact terms mean publishers can’t offer any special deals (lower price or exclusive content) that isn’t also available in-app.  Apple is perfectly fair asking for a cut of NEW subscriptions from iOS, as pointed out in this article.

gprovida

“...Oppenheimer added that Apple continues to run the App Store at “just a little over break even.”

A second question about Apple’s cut for publishers asked whether newspapers can afford to give up 30 percent of their revenues, to which Cook answered that the split Apple shares only applies to new customers, and that publishers can bring their existing subscribers content through App Store titles at no cost, managing that themselves. Apple’s executives made it clear that the 30 percent cut is not the issue, and that the real controversy is related to customer information.?

“We believe customers should decide” whether to share their data, Cook said, adding that “we want journalism,” a response to the question’s fear that Apple’s cut might doom struggling newspapers.? ...”

Note the issue is not the cost but privacy.

Nemo

Dear webjprgm:  In the parlance of international trade, Apple is demanding a Most Favored Nations (MFN) clause, that is, Apple is requiring that it at least get the best terms that any developer/publisher (Publishers) offers.  Now, if you know of a way other than an MFN clause to ensure that Publishers don’t funnel all subscriptions away from the App Store by offering the highest subscription price in the App Store, while offering a lower price elsewhere, I tip my hat to you, and I am sure that Messrs. Jobs and Cook would love to hear about your method.  But the reason why nations in international trade treaties, such as the WTO, insist on MFN clause is that no one has discovered or invented a way to ensure fairness in trade terms without an MFN clause.  Without MFN, set tariffs would replaced by discriminator trade terms, which would have the same discriminator effect as tariffs.

And MFN clauses are common in retail among major retailers, at least in competitive markets, which I believe, admittedly without having done the requisite economic analysis, the app subscription market to be, even after the imposition of Apple’s new subscription policy.  Many retailers, such as WalMart, Amazon, et al. require MFN clauses, and such clauses are proper, at least in competitive markets.  Because I believe that the markets for app stores and apps are sufficiently competitive and are becoming more so every day, Apple’s MFN clause is likely not a violation of U.S. antitrust law.

akcarver

That, in turn, lead to Tim Cook making the case that free apps are a big part of the iOS app store ecosystem, and that Apple supports those apps ? many of which make developers money in indirect ways ? in order to support the broader iOS platform as a whole.

GRAMMAR ALERT! It’s led, not lead.

Peter

Now, that is what I call a rapacious monopoly, running at just above breakeven.? So what to do publishers want, for to Apple run the App Store at a loss to subsidize their profit making publications/apps?? Apple is already supporting free apps out its revenues from the App Store.? To avoid being called evil Apple must, according to the likes of Time Warner, Sony, Amazon, and others of their ilk, run the App Store at a loss to subsidize Time Warner?? Or Sony? Or Amazon? Or any other subscription fee app?

I love this.

Here’s a crazy idea that would solve Apple’s problem:  Allow developers to host their own Apps!

This is where I get annoyed.  Apple sets this rule that everything must run through them.  Then they whine that they can’t make money doing this and they have to have “other” streams of revenue (like subscriptions).

The e-book progression:

1.  Steve Jobs disses e-books—“Nobody reads anymore.”
2.  Other companies come in and sell a bunch of e-books as stand-alone apps, etc.
3.  Apple says, “Oh.  I guess people do read.  We’ll come out with the iBookstore.  But developers don’t need to worry—competition is a good thing.”
4.  Apple says that Amazon can’t sell books from inside their app.  Amazon changes the App to launch the web browser.
5.  Apple dings apps that are “the same app wrapped around different content.”  There goes a bunch of competition right there.
6.  The Kindle App still dominates iBooks because it has 10x the number of books.
7.  Apple dings the Kindle App as being a “subscription” service and requires 30% of every book that Amazon sells.

Damn.  I mean, Microsoft would be proud…

Bosco (Brad Hutchings)

Here?s a crazy idea that would solve Apple?s problem:? Allow developers to host their own Apps!

It’s funny, huh? Every developer could host their apps with PayPal and the ESD shopping cart of their choice and none would pay more than 10% as the cost of the sale. They could get better listings from a system like MacUpdate, and better feedback from users. Yet Apple aggregates this and breaks even on 30%.

paikinho

Yet Apple aggregates this and breaks even on 30%.
————
seems fishy doesn’t it?

Bosco (Brad Hutchings)

I wonder how many developers would keep their apps exclusively on the App Store if given other options for distributing iOS apps. I also wonder how many of the free apps would stay in the App Store if there were other options versus having to pay $99/year for having their apps reviewed. Whaddya think paikinhom, maybe all of them?

Martin Hill

Yeah, I’m sure they’d be as successful as all those Android developers who can do just that, eh Bosco.

App Store Revenue 2009 - 2010
(source: IHS):
- iOS developer income grew from $769 million to $1.782 billion = $1.01 billion increase YoY
- Android developer income grew from $11 million to $102 million = $91 million increase YoY

It sure used to work well for all those shareware authors who became millionaires hosting, advertising and setting up their e-commerce site on their lonesome before the App Store came along….  *crickets*

...oh wait…

*rolls eyes*  (again)

skipaq

Fudd! The issue is and has been customer info. The percentage taken by any distributer is only smoke pointing to the fire burning below. Customers will decide where they buy and the publishers will go to that store too.

Nemo

Well, I can see that we’ve pretty much cashiered that Apple is greedy nonsense, so now we are back to it’s Apple’s fault for not permitting side loading of apps.  Well, that idea is working terribly for Google’s Market Place (Place).  The Place isn’t making any revenues, at least not any monetary revenues; it is plagued by developers having their apps pirated; its DRM is so ineffective that media companies are reluctant to license their content to Google; its post hoc security model is only capable of responding to malware, after it has infected Android’s users; developer readily acknowledge, some of them even publicly, that you can’t make money on the Place with a pay and/or subscription model; because the Place is such a poor place for paid apps, the Place is home to far more crap apps than the App Store; there is no practical benefit to side loading, because Apple approves 97% of all apps submitted to its App Store, and Apple, unlike Google, must prevent illicit copying of the media companies content, less it lose its licenses to sell and rent that content.

The foregoing reasons prove that Google’s model of permitting side loading in addition to getting apps from the Place is foolish, ineffective, and destructive to a healthy app ecosystem.  That is why Apple is wise and right not to permit side loading of apps.

Nemo

Oh yeah, as Mr. Hill said, supra, developers aren’t making any money either side loading or selling on the Market Place in Android’s ecosystem, though Google is probably doing at least okay.  So another virtue of the Android ecosystem is that developers don’t make any money.  But at least parents get some relief:  There is some much free junk in the Market Place that their kids don’t want it and, if they do want it, it is most likely free, so parents don’t get big bill from their kids buying apps in the Market Place.

And as skipaq said, supra, this isn’t about the Apple’s 30% commission; it is about customers’ personal/private information.  If Apple had the same type of privacy policies that Google and Facebook have, it too could convey its customers’ personal data to publishers for a fat fee and, by continuing to run the App Store at near break even, reduce its take to almost certainly less than the 10% Google charges for its One Pass paywall.  But that only works if, like Google, Facebook, et al, you pimp your customers’ private, personal information.

Bosco (Brad Hutchings)

So quit rolling your eyes and complete out the math Martin. Assuming 1/2 of apps in the App Stor are paid, that’s what, $12K per paid app. And that assumes an even distribution, which isn’t the case at all. Yes, there is an opportunity to make money in the App Store, for a relative few. Oh, and if you’re at the portion of the curve where you make about $1000 in a year, how long do you have to wait for your check? On Android Marketplace, you get paid as the sales happen.

Oh, and while you’re running numbers Martin, project those relative growth rates out 2 years, and know that because Google isn’t hiring a bunch of developers for make work approvals, they’re probably doing better than breaking even.

Martin Hill

Ok Bosco, I can trust you to keep my eyeball muscles exercised.  wink

Let’s do some maths based on your estimate shall we?  Teenage developer writes half a dozen apps in his bedroom after school and makes on average $72,000 per year.  Hey, even half that figure sounds pretty good to me.  You don’t have to be a millionaire to do well.

Several colleagues of mine at work in their spare time have written a few apps each several of which are bringing in several thousand dollars a quarter and they haven’t had to do any advertising, hosting, e-commerce hassle etc.  They wouldn’t have bothered if it weren’t so darn easy with Apple doing all the heavy lifting.

I wouldn’t say no to that nice bit of extra income.  Then you have the chance of hitting it big like that 14 year old did and suddenly you’re a millionaire like many other success stories in the Apple ecosystem.  I wouldn’t complain. 

-Mart

Bosco (Brad Hutchings)

So Math Professor Martin doesn’t understand why averages are not indicative of distributions. But Martin is good at digging up numbers, so maybe he can tell us how many apps the App Store had at the end of 2009. I’ll save him the effort. Scroll down to milestones.

Here’s why this is interesting. Take the end of year number for 2009, which is 120,000. Assume half of apps are paid, devs get 70%. Average dev income per paid app is about $9000.

Now, I was using 300K apps for end of 2010, but it’s actually 400K+ according to this article. With the same assumptions, the average dev income per paid app is about $6300.

Does anyone else see what’s happening with this trend?

Oh, and BTW, Rovio is bringing a paid version of Angry Birds to Android in March. They have to be out of their frigging minds, right? Please explain.

Martin Hill

Oh and yes, let’s project those relative growth lines out shall we? 

LookOut Mobile Security graphed App numbers for starters and guess what the graph looks like.

Wouldn’t you know it - the huge gap between Android and iOS numbers just gets larger and larger.  It’s amazing what the reality is like when ridiculous “growth” percentages are revealed for the sham they actually are (not to mention how many actual apps Android has when you don’t count ringtones, wallpapers or soundscapes - shame they haven’t deleted the 45% of Android apps that are spamware as well).

How about a graph of number of developers for Android vs iOS then?

Even more revealing isn’t it?

-Mart

Bosco (Brad Hutchings)

That’s funny Martin, because Android increased 10x YoY, while App Store about doubled. I know this is tough math, but extend those phenomenal growth rates out out two years:

2011 - Marketplace $950M, App Store $3.8B
2012 - Marketplace $8.8B, App Store $8.5B

I’d bet parity happens faster because the Android products are more than good enough to be perceived by most as magical and there is less friction on the Android side. But that’s what I was saying about phones more than a year ago, and we all know how that panned out now. Besides, if Apple can’t make a profitable business out of $1.7B in revenue, it’s not going to scale at any level. I can’t wait for the article that explains why Google is taking all the profits in mobile apps.

Martin Hill

And let’s have a look at some more numbers since we’re on a roll. grin

Installed base
- “There will be an installed base of 140 million Android portable devices, including smartphones and tablets, by the end of 2011” according to IMS Research.
- iOS installed base (Dec 2010) = 160 million with the vast majority of those added in the last 2 years.
With Apple shipping 33 million iOS devices in q4 2010 (16 million iPhones, 10 million iPod touches and 7 million iPads), the projected iOS installed base will hit somewhere around 250 million by the end of 2011 if current iOS sales rates stay the same.  However, iOS sales rates have been doubling every year so this figure is enormously conservative.

Advertising income per user
(source: Mobclix)
Mobclix’s recent stats demonstrate that in the Advertising game, iPhone users are far more valuable than Android users. 
In the Games category, the average iPhone user brought in more than double the advertising revenue per month compared to the average Android user, a third more income in the entertainment category and 30% more in the utilities category.
Even on Google’s home turf - advertising - iOS beats Android. 

Phone Manufacturer Profit Share
(source: Asymco)
Despite only having 4% market share of the entire cell phone industry, Apple captured 51% (up from 48% last year) of the profit share of the entire cell phone industry compared to Motorola on 1%, Samsung on 2%, LG on -2% and Nokia on 17%.

So, to summarise, which mobile OS platform will continue to have by far the largest installed base for years to come?  Which platform brings in 10x the income for developers compared to the other?  Which platform has the most apps by a country mile?  Which platform has the least malware?  Which platform has the most free apps?  Which platform has the most games?  Which platform has the top tier games?  Which platform has by far the most hardware peripherals, cases, docks, car interfaces etc?  Which platform has no spamware?  Which platform brings in the most advertising income per user?

Why that would be iOS of course with Android trailing very far behind in most of these metrics.

As such, by any measure, developers would be pretty foolish not to develop for iOS first and realise that Android may not be the nirvana people like Bosco make out.  grin

-Mart

Bosco (Brad Hutchings)

As such, by any measure, developers would be pretty foolish not to develop for iOS first and realise that Android may not be the nirvana people like Bosco make out.

Martin is talking about developers like the guy who had a Swimsuit Catalog booted out of the App Store a year ago. Here’s a relevant passage:

The Simply Group, which employs 24 people, had invested precious resources to build the app. And developers were in the midst of making significant upgrades, such as multi-currency pricing and video streaming. The ban, Dennis says, had “put people’s jobs at risk as we rely on all income streams.”

Sudden Reversal
Suddenly, four days later, Simply Beach reappeared on the App Store with nary a word from Apple.

This episode has shaken Dennis’ confidence in Apple. Will Apple remove the app again in a few weeks on another whim? Dennis says he remains committed to Apple’s App Store, “but we will now explore other platforms as a safety net against this sort of thing happening again, either deliberately or otherwise.”

I never said that Android is “nirvana”. But Google does not pull stupid, controlling stunts like that. Nor does Google do it repeatedly (because they don’t do it in the first place).

Martin Hill

Ah yes, try and change the subject again Bosco.  Well, I’m going to answer the screaming lunacy of your “phenomenal growth rates” first and demonstrate the true trajectory of these figures.

You obviously don’t realise that Android app “growth” percentages for example have plummeted from 16x growth in only 3 months from 2008 - 2009 to only 12.5x growth in the whole of 2010 have you?

22 October 2008   0 apps    
23 October 2008   50   Infinite growth
18 January 2009   800   16x growth in 3 months (equivalent to 64x growth over 12 months)
16 December 2009   16,000     20x growth
31 December 2010   200,000   12.5 x growth

(mind you there are of course only around 100,000 Android apps available once you subtract ringtones, wallpapers and soundscapes, so this growth rate is far less again)

Oh no!!! Android dropped its growth rate by 300% comparing 3 months in 2008 to 2009! If we extrapolate that over 12 months, Android percentage growth rates dropped 1,200% Year over year.  We’re doomed!

In fact from the 22nd to the 23rd of Oct 2008, Android had an INFINITE growth rate going from 0 apps to 50 apps!!!  OMG!

You see this shows what a complete and utter bit of clap trap nonsense your percentage growth figures are.

No-one in their right mind would assume Android will see a continuation of a 10x growth rate in 2011.  As an entity gets bigger, percentage growth rates are more and more impossible to sustain and the plummeting graph of Android app percentage growth numbers proves that.  SImple maths really.

However, it is quite evident that the industry is terrified at the dominance that Apple has achieved in such a few short years so companies the world over are going to continue their campaign aimed at discrediting Apple and iOS and paid analysts are only going to continue publishing these blatant lies and distortions at all costs and hope that the general public doesn’t cotton on.

So unfortunately, there is probably no stopping the flow of lies and disinformation from people like you Bosco.  :-(

-Mart

Bosco (Brad Hutchings)

Gee Mart, how is it changing the subject to point out the downside of having all your eggs in the iOS basket, or putting your eggs in that basket first, when you claim developers would be stupid to not develop for iOS first.

I don’t remember if you were one of the guys mocking me a year ago for predicting that Android phones would eventually beat iPhones in market share. Because many here did. The fundamentals are the same with app sales, and they are much deeper than nerdy people wanting open stuff. Look up Tunisia, Egypt, and Libya. Tightly controlled systems cannot maintain power or influence when people realize that freer alternatives don’t cost them much. Mubarak warned about the Muslim Bros. Moamar is blaming Al Queda. The people know it’s bullshit.

Oh, BTW, the biggest controversy of the month in Android land was solved today, about a week after it emerged. Verizon dropped its silly Xoom data plan activation requirement. This is how a mutli-player competitive market within the Android ecosystem tends to keep the crazy crap from getting out of hand.

daemon

Am I the only one to question what Oppenheimer meant by ?We run the App Store just a little over breakeven??

We know the App Store sold $1.782 billion worth of apps of which Apple took home $534.6 million.

Now, to me half a billion dollars in revenue is pretty darn huge, but what are the costs? If we roll into the costs all thirty of the App Store gate keepers who approve apps with say an average salary of $100 thousand (yeah, I know it’s more likely they’re being paid $28 thousand, but whatever) that gives us about $3 million in overhead just for approving apps. For the servers, we’ll say Apple is using a Data Center similar to the one they’re building for $1 Billion in North Carolina over the next nine years. So broad estimate of cost for one year of service is around $200 million. And then there’s all the R&D and QoS testing they have to do for developing those Apps $0. And the utility costs we’ll put at say $100 million. So all told a rough general estimate of cost of $303 million on $534.6 million in revenue. Over 40% profit on revenue is not “just above break even.”

Martin Hill

Heh, still silence on the topic of the Android industry’s fraudulent “growth percentages” and the reality of plummeting annual growth rates eh Bosco?  No comment on the huge and continuing lead iOS has in installed base either?

The reality of Apple’s vast lead over Android just hitting home too much I guess hence you now trying to change the subject to developer happiness and the Xoom controversy.  You’re very transparent aren’t you Bosco when caught in a lie?

-Mart

DrShakagee

Do iAds make Apple profits? I wonder if they counted iAd revenue in their “at a near loss” figures. Some how I doubt it, and without the free apps there is no iAd revenue.

Brian

You nailed it.  A bunch of Fandroids are the source of all the whining here.

Chris

Except I believe you left out at least two of the biggest costs: network bandwidth and credit card transaction processing

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