October 16, 2003 2:59 PM PDT
Will iTunes make Apple shine?
Instead, Apple is counting on the store as a key part of an overall music business for the company that can produce substantial profits--mainly through sales of its iPod digital music player.
"The iPod makes money. The iTunes Music Store doesn't," Apple Senior Vice President Phil Schiller told CNET News.com in an interview Thursday after the launch of the Windows version of the store.
Schiller said the music store is close to profitability but is still losing money. Apple doesn't see the business as having much long-term profit potential either.
Other computer industry veterans have offered similar assessments of the market in recent months.
"It's maybe a feature your platform should offer, but it's not like you're going to make some (big) markup," Microsoft Chairman Bill Gates said at the company's July analysts' meeting.
Competition is heating up, with recent announcements from Musicmatch and Roxio's Napster 2.0. Although Apple is boasting a 70 percent share of the legitimate download market, the business is already seeing an increase in competition that is likely to put more pressure on already slim margins.
Apple has said in the past that the store was not profitable, but it has said little about the business model. Analysts have said the costs could well exceed the 99 cents per song that Apple typically gets.
Rather than trying to wring profits out of a few pennies per song, Apple said it is counting on a Windows version of its music store to help drive iPod sales higher. The company has sold about 1.5 million iPods so far, with roughly half of those being bought by Windows users, Schiller said.
Apple Chief Financial Officer Fred Anderson said in July that the music store could be a "trojan horse" for getting more people to buy iPods.
The company has used a similar strategy with programs such as iPhoto and iMovie, offering the programs for free as a way to sell more Macs. Indeed, iTunes was initially designed to provide the Mac with a competitive weapon against Windows PCs when it came to music.
Schiller said there are plenty of other distinguishing features of the Mac and that it's important for Apple's music business that the company offer the same iTunes software for Windows customers as it has on the Mac.
iPod growth groove
Already, the iPod has been a major driver of both sales and profits for Apple, which posted better-than-expected earnings Wednesday, due in large part to record iPod sales. While Apple's Mac sales grew 10 percent from a year ago during the quarter, overall revenue grew at nearly twice that rate on the back of a substantial leap in iPod sales.
"While the profitability of the iTunes store right now is questionable, the popularity of the iPod is not," said Tim Deal, an analyst with market research firm Technology Business Research. "Sales of the iPod generated $121 million in revenue, up 9 percent from the prior quarter and 128 percent from a year ago. The dramatic increase of sales of the iPod is worth taking note of."
With the Windows store, as well as partnerships with America Online and PepsiCo, Schiller said, Apple is hoping to reach a larger audience beyond the Mac enthusiasts who tend to follow Apple's moves closely.
The company has committed to selling 100 million songs by next April, although a Pepsi Super Bowl sweepstakes promotion--in which the company will give away 100 million iTunes songs through specially marked bottles--combined with Apple's existing business, should just about cover that goal.
Apple has been able to consistently sell more than 500,000 songs per week to Mac users. Schiller said he expected that even the number of iTunes songs it sells will rise, but he said it is unclear how many more songs it will be able to sell through the Windows version.
"We'll know a lot more in a couple of weeks," he said.
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