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Summary:

Apple made quite the fuss about the App Store download total reaching the 1 billion milestone, complete with a contest and what was probably a fairly expensive advertising campaign. It seemed appropriate at the time, but I’m now wondering if promoting the landmark achievement didn’t cost […]

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Apple made quite the fuss about the App Store download total reaching the 1 billion milestone, complete with a contest and what was probably a fairly expensive advertising campaign. It seemed appropriate at the time, but I’m now wondering if promoting the landmark achievement didn’t cost more than it was actually worth.

Jeremy Liew, the managing director of Lightspeed Venture Partners, reported in a blog post that, according to his estimates, Apple couldn’t have made more than between $20 million and $45 million on all those apps. That’s not a whole heck of a lot, when you consider that maintenance and advertising could carry a hefty expense.

Liew talked to developers and others in the industry to arrive at a rough estimate of what the ratio of paid to non-paid apps in the App Store was, and came up with between 1:15 and 1:40. He then used O’Reilly’s recent survey about the mean price for apps, which is $2.65 (which he points out is probably much higher than the weighted average mean), and then multiplies that by 25 million to 50 million paid apps, what you get when you apply the ratio estimates Liew arrived at in the beginning.

Total revenue for all paid apps would then fall between $70 million and $160 million. Apple, according to its revenue-sharing model, then gets 30 percent of that, leaving it with between $20 million and $45 million. Liew also notes that if you do the same calculations with a weighted average app price of around $1.50, which is probably closer to the truth, the number drops to only $12 million to $27 million. $12 million probably doesn’t even cover the App Store’s advertising budget to date, let alone operational costs.

There are a lot of speculative numbers there, but even given the generous range of revenue possibility, that would mean the App Store is far from being a cash cow for Apple. It would, at best, be a minor direct contributor to its bottom line, and at worst actually an income drain that costs more to run than it takes in. Of course, even if it is operating at a small loss, that’s to be expected for a venture in its first year, so Apple wouldn’t really be acting out of the norm there. Sony sold its PS3 consoles at a loss initially, counting on the software revenue to cover the difference.

Apple seems to be doing just the opposite. If Liew is correct, it’s using the App Store as an incentive to get buyers to pay up for iPhone and iPod touch hardware, which is where the real money is made. That’s great news for us Apple consumers, because as long as the store keeps bringing in hardware buyers, Apple will make sure developers get lots of new hardware feature updates to play with to entice those buyers.

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  1. I doubt Apple cares all that much about the income from the App Store — so long as it’s not much of a drain. It is, for many, the best reason to buy an iPhone or iTouch, and that’s where the money is. It’s just like iTunes. Apple has said it runs only slightly in the black, and that’s ok. iTunes is designed to drive iPod sales, and it has done so very effectively. Same with the App store.

  2. While this is an interesting intellectual exercise, the fact of the matter is that Apple isn’t in the business of selling apps … they’re in the business of selling iPhones. Apps draw people to iPhones. While I’m sure Apple would be happy to see revenue from apps rise, I can’t imagine that’s front and center.

  3. “There are a lot of speculative numbers there …”

    This is probably the truest statement in the article. When the entire house of cards is based on an original estimate of revenue that ranges from 70 million to more than *double* that figure, then nothing after that is worth talking about.

    This is just a bunch of talk about “probabilities” based on nothing at all. It’s like talking about car efficiency when all you have to go on is that the car gets “somewhere” between 10 and 100 miles to the gallon. It’s an estimate of a probability of an estimate of an approximation based on nothing.

  4. The App Store is what’s making iPhone sales. The money from the App Store is gravy. I don’t know about you, but I think $20 mil is some nice gravy.

  5. Steve has said many times that they don’t make any money on the iTunes Store and he’s quoted as saying it’s only purpose is to drive the sales of iPods which everyone knows has a huge profit margin.

    Doesn’t apple only spend 30% of the retail price on the parts alone, maybe another 20% for R&D, packaging, marketing so a $200 iPod is $100 in cash profit and you multiply that by thousands!

    So a $699 iPhone after $200 in parts and other stuff makes apple millions over the course of a few million iPhones. the app store just drives the sale of iPhones.

  6. Evan Varsamis Thursday, May 14, 2009

    Why dont you ask your self the following question. Did Apple made the App store in order to earn money? If you think so then (sorry) but you are dumb.:) Apple dont care at all about app store instead, they care more about the people that using the app store because on the future when the new iphone releases it will have double or triple sales than the 3G.

  7. The absolutely hilarious perspective on all this is that ALL of Apple’s competitors are falling over themselves to produce App Store competitors. And if Apple isn’t making any money at it at a billion apps downloaded, then it is unlikely that anyone else is going to fare significantly better. More likely that they’ll all be losing money on their stores.

    Nicely played, Apple!

  8. Josh Pigford Thursday, May 14, 2009

    @Gazoobee: I still think there is value is discussion around this. Of course you don’t approve of it, but as you can see, other commenters have jumped on board with talking about this and not just complaining.

  9. It’s retention. Which is helpful since iTunes went DRM free.

  10. Don Synstelien Thursday, May 14, 2009

    I think the only salient point made here is in the last paragraph. Of course Apple pushes the App store for the purpose of selling hardware. Anyone thinking that Apple is trying to generate real revenue from the actual sale of apps is kidding themselves and not thinking big enough.

    Why push hard for 30% of $.99 when you can use the excitement of the store to garner the considerable profit off of 30+ million iPhones and iPod Touch devices.

    Don

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