I’ve mentioned this concept in a few recent AFB posts and elaborated on the topic at Eventide.

It’s in follow-up to the discussion in this AFB topic about the pricing of Apple’s much-rumored tablet device.

I see Apple moderating the price of the forthcoming tablet to gain a competitive advantage (the more attractively priced the product the higher the barrier to competitive entry) and to feed a fast-growing segment of Apple’s revenue mix - iTunes Store sales.

In the case of the forthcoming tablet, I’m suggesting the product will be attractively priced (well under $1,000) to drive device sales, provide yet another iPhone OS-enabled device in the marketplace and thus increase recurring revenue from iTunes Store sales including music, movies, apps, content subscription services, etc.

I see iTunes Store sales as an increasingly important source of recurring revenue for Apple and a means to further build out the iPhone OS eco-system consisting of Apple, app developers, commercial content owners, etc.

I see an attractively priced product to attract customers, provide yet another avenue for high margin AppleCare sales and to boost the number of iPhone OS-enabled devices in the marketplace.

I see rising iTunes Store sales as a “sleeper” revenue source mostly now overlooked but a revenue category that will increasingly grow in importance for Apple as the company purposely designs its products to be not only highly functional digital devices, but highly effective and efficient conduits for iTunes Store sales.

A lesson can be learned from moderating prices on the MacBook Pro line and the pricing on the new iMac line. Attractive pricing sells units and unit sales can be gained not so much by drastically reducing margins but by moderating margins and retail prices at the start of the product cycle, allowing for slight gains in margins as manufacturing economies eventually come into to play and unit sales rise.

iTunes Store sales growth could add well over $1 billion to Apple’s revenue results this fiscal year. I think the revenue generated by iTunes and the competitive advantage it creates is overlooked in the discussion of Apple hardware products.

I agree that Itunes is a definitely a big part of Apple’s growth.  The 70/30 mix gives Apple a part of a bunch of micro-payments.  Andy Hargreaves did an analysis back in 2007 based on itunes music, but the percentages are probably in range for itunes wether we are buying Apps, Music, Movies or Books.

Hargreaves calculated the network fees at $0.05 per song, which includes the delivery fee, and the hardware and software to facilitate delivery. “Operating expenses are likely less than $0.05 per song, based on the relatively small number of employees we believe work on iTunes,” he wrote.

Then, of course, there’s the transaction fee—or royalty paid to credit card companies each time a sale is processed—which Hargreaves argues is “the primary reason iTunes profitability has not been higher historically.” However, he notes hat Apple has recently adopted a number of measures to limit those fees, such as managing a weekly sweep of its credit card transactions, broadly distributing gift cards, and by encouraging larger transactions

If we fast forward to 2010 the number of micro-payments has skyrocketed which should have allowed Apple to improve their Operating Margin a couple percent.  My guess 12%  a nice bit of profit which will continue to grow as we move to a digital delivery mode for more content.  Apple has become a huge player for digital content and will replace brick and mortar stores for the content they provide digitally.

Edible Apple had an article on why Apple’s App store is more successful then other competitors.

The biggest hurdle when it comes to online sales is getting a consumer to hand over their credit card information. Once that’s out of the way, one-click purchasing provides a seamless way for consumers to access content without conjuring up any feelings of intrusion, while also greasing the wheels for inevitable and important impulse buys.  And because Apple has millions upon millions of customers with credit cards already linked up to their iTunes accounts, it’s been able to sidestep an issue that other mobile software stores have to contend with.
Every step between a click and the checkout page simply provides users with another opportunity to second guess their purchase and decide not to pull the trigger. That being the case, developers need to look beyond the sheer number of apps between competing app stores and also take into consideration which app store tends to attract customers more willing and more likely to part ways with their hard-earned cash. “App developers, seeing that the paying Android customer base is much smaller and less spendy than its iPhone counterpart,” Boutin writes, “don’t rush to build an Android version of their app.”