iTunes is almost as big a biz as OEM Windows

Apple's revenue from music, apps and services equal 91% of what Microsoft made from the group that sells Windows to computer makers

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Unlike Apple's iTunes, Microsoft's Windows OEM revenue -- the bulk of D&C Licensing's sales -- isn't tied to the installed base of Windows-powered devices, but to new hardware sales. When PC shipments tank, as they have the last two years, Microsoft's revenue drops as well. That's one reason why Microsoft, under former CEO Steve Ballmer, said it wanted to shift income to services. It's also why the company's pushed hard to convince customers to, for example, subscribe to Office 365.

But revenue doesn't tell the whole story, Gottheil warned. Profits matter too, and there Microsoft has the upper hand. D&C Licensing's gross margin for the December quarter was a whopping 92.5%, with about $5 billion in gross profit.

"There ain't no better business than the software business," Gottheil quipped, referring to the very high margins software has historically enjoyed.

Because Apple doesn't report gross margins on its financial statements, a direct comparison is impossible. But most believe iTunes is not delivering huge profits. "The reason [iTunes/software/services] is largely ignored is because it is not responsible for a significant contribution of profit," said Dediu in an email reply to questions today.

Gottheil argued that the non-profit days were behind iTunes, and that it is adding to Apple's bottom line. "Everyone used to think that iTunes was running just slightly ahead of break-even," Gottheil said. "I don't think that's true anymore. I think it has a pretty good margin now."

He cited the scale of the iTunes, software and services division's operation, which drives down costs, as well as the explosion of in-app purchases, which require little or nothing on Apple's part, as major factors in boosting margins.

And iTunes provides other benefits to Apple beyond revenue and profit, the experts contended.

"iTunes/Software/Services is a critical component (along with Retail) which sustains Apple's core business," Dediu asserted. "It's important to understand it as a part of an integrated approach to [Apple's] business. The inter-dependency of the iTunes/Retail/Product operations is crucial to understanding both the strength and the weakness of Apple."

Gottheil put it more prosaically. "It's all goodness, it's all incredibly sticky," he said of iTunes, pointing out that the more a person spends on the goods and services it provides, the less likely he or she is to desert to another mobile ecosystem, because the apps and music and services won't make the move, too.

"Overall, this is not a bad business Apple has going," Gottheil said.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at  @gkeizer, on Google+ or subscribe to Gregg's RSS feed . His email address is

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Copyright © 2014 IDG Communications, Inc.

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