iTunes profitable, Billboard estimates

Apple hasn't disclosed detailed financial information for iTunes Store, but according to back-of-the-envelope calculations, scale helps the No. 2 music retailer turn a profit.

iTunes is the No. 2 music retailer in the United States ( behind only Wal-Mart Stores ), and it passed the 4 billion download mark in February, but nobody knows how much money Apple's actually earning from the service.

In Apple's earnings reports, iTunes revenue is lumped into a category called "other music-related products and services," alongside licensing revenue from iPod peripheral makers, and the company doesn't break out expenses or operating profit by segment.

It's No. 2 in the U.S., but how much money does it make? Apple

So some Billboard reporters decided to do some back-of-the-envelope calculations, using Amazon.com's expenses as a benchmark for a large-scale e-commerce operation. They conclude that iTunes earned an operating profit between $160 million and $390 million on revenues of roughly $1.7 billion in the year ended September 30, 2007. They believe that the profit is probably on the lower end of that range--or perhaps even below it--because Apple spends more money on marketing and technology (the latter, because each sale must be fulfilled with a song download).

This is good news for all those start-ups wondering if it's possible to earn money with digital downloads: the answer is yes, if you get enough scale. But for Apple, iTunes is a drop in the bucket, compared with the business of selling iPods. The company garnered more than $8.3 billion in revenue from iPod sales in the year ended September 2007 , and teardowns tend to suggest that profit margins are pretty high on iPods.

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About the author

    Matt Rosoff is an analyst with Directions on Microsoft, where he covers Microsoft's consumer products and corporate news. He's written about the technology industry since 1995, and reviewed the first Rio MP3 player for CNET.com in 1998. He is a member of the CNET Blog Network. Disclosure. You can follow Matt on Twitter @mattrosoff.

     

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