Slim or no margins in online music sales
Steve Jobs recently told investors that it's very successful iTunes music site is not, and may never be, a money maker according to this very interesting Wall Street Journal story (subscription required).
Selling song downloads turns out to be a low-profit-margin business. Of the 99 cents Apple and other sites charge for a song, the companies pay anywhere from 65 cents to 79 cents in wholesale costs to music companies, analysts and industry executives say. Credit-card processing fees, bandwidth charges and costs related to customer service can, in some cases, eat up whatever profit is left over.
"The margins are very low and quickly become negative," says Mr. Ryan of RealNetworks.
Consequently, many of the online music competitors seem to have ulterior motives for chasing the business. Apple executives say the strategy behind iTunes Music Store is to sell more iPods, the pocket-size gadgets that let users carry up to 10,000 songs. The company has sold more than 1.4 million of the devices, which start at $299 and carry profit margins of about 20%, according to analyst estimates. Although iTunes users can listen to music on any desktop computer, the iPod is currently the only portable music player that works with the Apple site.
Since profit margins are slim for individual songs some of the new competitors to Apple are hoping to lure music listeners into signing up for monthly subscriptions where the margins are much higher.
Apple rivals including Roxio, RealNetworks and Musicmatch -- a software company best known for its music software for PCs -- concede that the profit margins from selling song downloads are slim. But they say their objective is to persuade as many of their users as possible to pay for subscription services, which can have profit margins of around 50%.Apple rivals including Roxio, RealNetworks and Musicmatch -- a software company best known for its music software for PCs -- concede that the profit margins from selling song downloads are slim. But they say their objective is to persuade as many of their users as possible to pay for subscription services, which can have profit margins of around 50%.