Apple Inc. (NASDAQ:AAPL) is preparing to celebrate a decade of business for its iTunes store, and a new report from Asymco indicates a major change in the department’s business model.
The iTunes store just set a new record of 25 billion songs sold last month, and it has nowhere to go but up—especially in terms of margins.
According to the report, even though the tech giant has said in the past that it wanted to run the store at a break-even level, Apple Inc. (NASDAQ:AAPL) is reaping huge profit margins from the service. One of the main reasons the iTunes store is doing so well is the Mac App Store, which has been in operation since January 2011. The addition of that feature was the turning point for iTunes. Instead of continuing to operate at break-even, it began to turn some massive profits.
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Here are some numbers to put it all into perspective. Running iTunes at just the break-even level would cost around $3.75 billion. Because of how high that number is, adding just a 1 percent margin would grant the company some hefty profits. And when you add the Mac App Store into the iTunes department, you really begin to see some huge numbers.
The Mac App Store covers much of Apple Inc. (NASDAQ:AAPL)’s software, including iWork, which includes the company’s programs Pages, Keynote and Numbers. Also iLife and professional tools like Logic Pro and Aperture fall under the umbrella now, enabling the department to reap some hefty profits.
The report from Asymco estimates that with all of these programs added into the iTunes department, it now brings in a 15 percent operating margin—well above the break-even expectations of 10 years ago. That adds up to more than $2 billion per year.
Of course while $2 billion is certainly a lot of cash, it’s just pocket change for Apple Inc. (NASDAQ:AAPL), which has more than $137 billion on its balance sheet. The debate over what the tech giant should do with all that extra cash has heated up in recent weeks, culminating in a lawsuit filed by hedge fund manager David Einhorn with the goal of blocking a proposal he believed would prevent Apple from issuing preferred stock, which he was trying to talk the company into doing.
Einhorn ended up winning that round of the battle, but the debate continues. Today on CNBC’s “Fast Money, 2929 Entertainment CEO Todd Wagner talked about what the company could do with its extra cash.
He talked about how many startup companies Apple Inc. (NASDAQ:AAPL) could fund. He said the possibilities of what Apple Inc. (NASDAQ:AAPL) could do are endless.