Apple Inc. (AAPL)’s Overlooked Weapon: iTunes

Page 1 of 2

Compared to Apple Inc. (NASDAQ:AAPL)‘s massive iPhone business, iTunes is seemingly negligible  But that’s no reason to deny iTunes’ significance. Among other digital stores, iTunes stands out as a major player. As the war for digital content continues, Apple may indeed face challenges, but a few advantages should help iTunes remain strong in the future amid increasing competition.

Apple’s iTunes and iCloud networks are getting stickier
The network effect is probably one of the strongest competitive advantages a company can have, as recently noted by Tim Cook at the Goldman Sachs Group, Inc. (NYSE:GS) Technology and Internet Conference: “We’ve found a huge correlation of people getting into Apple Inc. (NASDAQ:AAPL) and buying their first product and then buying another product.” This is partly due to Apple’s strong network effect in which the relevance of its digital stores (iTunes and Mac App Store) become more useful and relevant with every additional user gained. The more iTunes is used, the more interested developers and major studios will be in adding content to the platform.

With the world’s largest a la carte digital store integrated seamlessly with its hardware and software, Apple Inc. (NASDAQ:AAPL)’s offering is both compelling and “sticky.” iTunes has a whopping 500 million iTunes accounts . Plus, over the last several years, the iTunes experience has been enhanced with the addition of the Mac App store and iCloud. iCloud’s ability to seamlessly transport content between one device to another with incredible ease adds tremendous strength to iTunes’ offerings. Already, iCloud users have grown from 85 million to over 250 million in fiscal 2012.

iTunes’ solid growth and substantial size
Horace Dediu of Asymco recently reported numbers that really put iTunes’ growing size into perspective:

  • It was only two years ago when Apple Inc. (NASDAQ:AAPL)’s iTunes business surpassed its iPod business in revenue. Now, in the company’s first quarter, iTunes revenue was 72% greater than iPod revenue. And based on Dediu’s estimates, iTunes is also more profitable.
  • iTunes is on track to surpass Apple’s Mac business in 2013. In fact, when Apple’s iTunes and accessories (including Apple TV) revenue are combined, Mac sales are dwarfed in comparison, representing just about half of the combined segments.
  • Over the past two years, Apple’s iTunes business has averaged an annualized growth rate of 30%, avoiding seasonal volatility.

To put things into further perspective, when Apple Inc. (NASDAQ:AAPL)’s fourth quarter iTunes and accessories revenue are combined, revenue surpasses sales of every major phone vendor except Samsung.

Due to reporting standards, it’s difficult to estimate Samsung’s mobile phone sales, though according to a Gartner, Inc. (NYSE:IT) report, the company sold 107 million units during the fourth quarter — more than double Apple’s.

What does all this mean? As the absolute size of iTunes grows, investors might need to spend more time valuing Apple Inc. (NASDAQ:AAPL)’s iTunes segment in terms of its business prospects as opposed to viewing it simply as an extension of Apple’s ecosystem that strengthens the company’s unique selling proposition.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

The 10 Longest Wars of All Time

The 13 Worst Looking Foods that Taste Great

The 6 Most Gruesome Injuries Suffered During a Sports Match

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!