Digital Goods: An Apple View (Big update on 7/28.. missed a big number… set developer rev share at 30%.. more than a little embarrassing. This changed my view on Apple’s accounting… but did not change my view on the App Store TAM. )
25 July 2011
I’m reading Apple’s 10-k today and also checking out an analysis by Canalys which is forecasting a 92% increase in App Store Revenue (Apple and all others) next year to $14B, and growing further to $37B by 2015. Remember back in January TechCrunch ran a store on on AppStore market growth going to $25B by 2015 (up from $6.8B in 2010), and Juniper estimated in-app purchase revenues going to $11B by 2015 (across all platforms, driven by social gaming).
Apple is certainly killing it with device sales (10-Q data below), but how does overall device growth impact iTunes and App Store?
From Oct 10-K we get that the iTunes Store (Including App Store), drove $4.1B in Sales.
From 3Q11 10K
As I stated in January.. Apple does not make it easy for us to separate out the different components of Digital Goods revenue as they are all lumped together in “Other music related products and services”. Here is what we do know:
1) Historical iTunes revenue and growth rates prior to 2008 launch of App Store
2) Public Statements on App Store revenue
3) Download rates of applications
4) Physical product unit sales
In June Venture Beat reported Apple senior vice president Scott Forstall said, “Apple has paid out more than $2.5 billion to developers for apps in the App Store.”
This statement has stumped me, and would love your opinion… at a 70% developer payout, this would mean that the app store had total sales of $3,570M over the (since 2008 inception). From SEC filings we know that total music related Sales from 2008 to present is $16,220M. If 100% of “developer revenue” was accounted for in “Other music related products and services”, App Store sales would be 22% of this category (on average from 2008).
If we chart the Other music related and the total sales related to total iPhone units in market we get a pretty bleak picture of app store efficacy (yes, Music related should also apply to iPod ++ but this is conservative). Another alternative (Scenario 2) is to assume that not all developer revenue is within “other music related…” category.
The App store is certainly critical to a holitistic platform strategy. Given that Apple owns the entire life cycle of the physical product (Deisgn, mfg, build, distribution, …), the App Store is the only area where external parties can participate. It is therefore in Apple’s best interest to court developers and spin the marketing machine here.
In my January blog, I analyzed app store revenue from Distimo data, consistent with approach of LightSpeed Ventures in their excellent 2009 analysis on Apple’s $25M App Store revenue estimate. The market has tremendous information on number of app downloads.. what we don’t see is much in the way of revenue numbers for paid apps (or in-app purchases).
December Revenue Estimate (excludes in app purchases)
350k * $2.43 *30 = $24.6M
For FY 2010 given 15% price decline and 40% growth rate, Apple 2010 App Store Gross Sales (Excluding in App Purchases)
= $24.6 * 12 * ((1 + 0.15/12)^12)* ((1-0.4/12)^12) = $228M
Apple’s Net App Store Revenue = 30% of $228M = $68.4M
These number align to Scenerio 2 (App store is 15% of Other Music related category) for 3Q. A significant “error” in the assumptions in of spreadsheet above is the assumption that App Store revenue is a consistent (linear) percentage of Music Related other.. Obviously this is not true (stated from 0.0 in 3Q08). In scenario 1.. this means that App Store revenue is a much higher percentage (greater than 22%) in recent quarters.
Independent of the current revenue composition, it is clear that App Store Revenue is not on an $11B trajectory this year (approximately $1.6B Sales for Apple FY11). App Stores are an extremely important element of Apple’s mobile platform strategy, but they are not currently a substantial revenue driver for either Apple or developers outside of gaming and a few focused applications. The Canalys estimate of $14B for 2011 seems very unrealistic. Given Apple’s FY11 trajectory of $1.6B App Store sales, I project 2011 App Store TAM to be approximately $2B. The App Store TAM is separate from the Gaming TAM (mobile), which is approximately $3B.
iPhone Sales are indeed exploding, as you can see from the Distimo data below, not all markets are created the same… and not all iPhones are going to new users. For example Asia (as a whole) appears to have rejected the concept of paid apps. Users that are refreshing their iPhone also do not repurchase applications. Number of new post-paid subscriptions are estimated below from Jim Patterson
It is very important to note trend in Other music related products and services (aka iTunes Sales) to Total iPhones in Market. We would expect to see solid absolute, consistent growth in iTunes sales as the number of iPhones expands. The data shows a highly erratic growth trend of 20% (iTunes Sales) on iPhone Sales growth of 140%+. In last quarter, Music Related other actually declined 5%… hardly a trend that will drive growth to $14B.. this year.. or 5 years from now.
Admittedly I have not wrapped up this analysis cleanly.. this is a blog not a treatise. I’d love your feedback on other numbers and perspectives.
Other related articles
Distimo is an excellent source for raw app store information ( http://monitor.distimo.com/ )