Apple Inc. (NASDAQ:AAPL) makes most of its money from iPhones and iPads; however, iTunes/Software/Services is the company´s fastest growing business. This segment is not only a key competitive asset for the company but it´s also becoming a massive business with serious long term potential.
The iTunes/Software/Services business generated $3.99 billion in revenue for Apple Inc. (NASDAQ:AAPL) in the last quarter. That is a relatively small fraction of total sales for a company with more than $35.3 billion in revenues for the quarter, but it’s a huge business on a stand-alone basis. For that matter, iTunes is already bigger than most media and entertainment companies
More importantly, the segment is growing at 25% annually and becoming an increasingly bigger part of the equation. iTunes billings translated to quarterly revenue of $2.4 billion, up 29% from the year ago quarter.
Wall Street analysts usually think of this segment as a competitive advantage that differentiates Apple Inc. (NASDAQ:AAPL) from its competitors and keeps users engaged to its much beloved ecosystem.
This is certainly an important observation, but maybe it’s time to give more consideration to the financial impact this business could have in the middle and long term. Judging by its size and growth rate, it’s an opportunity that should not be overlooked.
According to Apple Inc. (NASDAQ:AAPL), users have downloaded more than 1 billion TV episodes and 390 million movies from iTunes to date, and they are purchasing over 800,000 TV episodes and 350,000 movies per day.
Movies and TV shows have considerably higher prices than the typical $1 per song the company charges for music, so iTunes could see a big boost in sales and profitability as users continue buying more video in the middle term.
Online radio and music streaming represents a challenge and an opportunity for Apple at the same time. Companies like Spotify and Pandora Media Inc (NYSE:P) have achieved remarkable popularity with their free or low cost music streaming services, and that´s a serious competitive threat to watch as it means Apple´s music business could be negatively affected by growing competitive pressure and changing consumer habits.
On the other hand, Apple Inc. (NASDAQ:AAPL) may be launching its own iTunes Radio as soon as next month, and the Cupertino giant could become a leading player in a growing niche.
eMarketer projects U.S. monthly Internet radio listeners will rise from 132.6 million in 2012 to 176.5 million in 2016, the research firm also estimates that Internet radio ad spending in the US will reach $97 million in 2013 and grow to $1.31 billion by 2016.
According to the Wall Street Journal, Apple plans to pay music publishers more than twice what Pandora Media Inc (NYSE:P) pays in royalties. Pandora Media Inc (NYSE:P) founder Tim Westergren has said that it isn’t fair to compare Apple Inc. (NASDAQ:AAPL)’s royalty rates with Pandora Media Inc (NYSE:P)’s because the services work differently, but the fact is that Apple has deeper pockets than other players in that business, and that´s a considerable advantage for the company.
Pandora Media Inc (NYSE:P) reported more than 71 million active listeners in the last quarter, up a 31% versus the same quarter in the previous year. Monetization has been improving lately as the company delivered a 97% increase in the much important area of mobile revenues for the quarter.