For the three-month period ended in September, Apple recognized $1.018 billion in revenue that, according to the financial statement "Consists of iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories." For the quarter this category represented 10.3% of GAAP revenue and a 22% gain in revenue over the prior-year period. Apple consolidates iPhone accessories revenue in a different category.
The increasing importance of iTunes Store revenue to Apple's revenue and earnings matrix is often overlooked. For example, while many of the media reports concerning the iPhone focus on AT&T's cell service issues, new competition from Android-based smartphones and the battle between Apple and Research In Motion for smartphone market share, the importance of the iPhone OS app economy is infrequently mentioned outside the context of more than 100,000 apps available as a competitive advantage in consumer hardware sales.
The iPod line (including the popular iPod touch) has reached a mature market position with the iPod touch materially responsible for the scant gains in unit sales, if any, and growth in sales revenue for the product line.
Due to the success of the Apple iPhone, it's expected some iPod sales would be cannibalized by iPhone sales. The iPhone, in addition to being a handheld computing and communications device is also an iPod and at subsidy pricing is priced attractively compared to iPod models such as the iPod touch and iPod nano.
But look at the unit sales numbers another way. One Wall Street analysts predicts cumulative unit sales of the iPhone and iPod touch to reach 78 million units by the end of the December quarter. Both the iPhone and the iPod touch use the iPhone OS and thus have access to the apps available through the iTunes app store. App sales alone will provide for yet another year-over-year surge in iTunes store sales.
The much-rumored Apple tablet, which most of us expect to be announced in late January, will presumably have access to the iTunes app store as well, adding another app-enabled device to Apple's hardware product matrix.
The iPhone, iPod touch (and the pending Apple tablet device) function even more effectively as content conduits and iTunes store revenue generation devices than the iPod line. Apple, in my view, is purposely designing hardware devices that generate as much constituent revenue as possible through iTunes Store sales.
Apple's revenue matrix, though highly dependent on hardware sales, is slowly migrating to a mixed revenue formula for recurring revenue from each device sold via of the iTunes Store.
The importance of iTunes Store sales to Apple's future revenue and earnings growth can be hardly overstated. Content availability drivers hardware sales whether it be over 100,000 iPhone apps available as a competitive differentiator in choosing a handset or the resulting direct sales of apps, music, movies, etc. to owners of Apple's hardware devices. For the three-month period ending in December, I expect the revenue category referenced at the top of this post to rise at least 25% both sequentially and in year-over-year comparisons, reaching at least $1.25 billion in the December period alone.I expect similar or greater year-over-year percentage gains in revenue for this category for the next several quarters.
This recurring revenue source provides Apple with the opportunity to continue to moderate hardware device prices in favor of greater recurring revenue from iTunes Store sales as more hardware devices are sold.