Apple 2.0

Covering the business that Steve Jobs built

How Apple profits from the App Store

May 14, 2009: 9:23 AM ET

App Store billion celebrationWith the passing of the 1 billion download milestone, several efforts have been made to estimate what that means in dollar terms for Apple (AAPL).

They're well intentioned, but they miss the point.

The latest, published Wednesday by Lightspeed Venture Partner's Jeremy Liew, estimates that Apple, which takes 30 cents of every dollar spent on the App Store, has cleared somewhere between $20 million and $45 million since the store opened 10 months ago. Liew's calculation is based on the assumption that the ratio of free to paid apps is in the range of 15:1 to 40:1, and that the mean price per app is $2.65.

Three weeks earlier, Geek.com's Christian Zibreg performed a similar analysis using slightly different assumptions (notably a more optimistic 10:1 free-to-paid-app ratio) and calculated that Apple is currently collecting revenue at the rate of $300,000 a day -- or $110 million a year. But he adds that the costs of running the store are unknown and could actually exceed Apple's share of the revenue.

Apple also collects revenue in the sale of iPhone developer licenses. As of March 17, Apple had signed up 50,000 individual and corporate developers. Individuals pay $99 for a license; enterprise memberships cost $299. Assuming that most developers pay $99, that's nearly $5 million billion in revenue for Apple.

But those membership fees are one-time-per-year payments, and they also have associated costs, including the cost of developing the SDK (software developers kit) and maintaining an extensive free library of guides, references, how-tos and sample code.

Even if there is money left over, and the sale of apps and developer licenses is generating a revenue stream for Apple, it's a trickle compared with the profits that are flooding in every quarter from what really matters to Cupertino: the sale of iPhones and iPod touches.

Apple booked $10.8 billion (non-GAAP) in fiscal 2008 from the sale of iPhones alone, and Piper Jaffray's Gene Munster estimates that it will book another $13 billion this year.

Steve Jobs said when he opened the App Store that it was designed to merely break even -- and he probably meant it. The apps, which can increase the utility of a mobile device exponentially, are there to bring in users. The profit for Apple -- as usual -- is in the high-margin hardware.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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