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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