With so much going on these days at Apple (AAPL_), it’s easy to forget about its little business called iTunes.In Apple’s fiscal 2011, iTunes represented 6% of its net sales, coming in at $6.3 billion.
In the most recent holiday quarter, iTunes clocked $2 billion in revenues. To put that in comparison, in that same quarter, Facebook did $1.1 billion in revenue. Even Google (GOOG_) overall only did $10 billion in revenues for the quarter.
iTunes is not a sexy product like iPhone or iPad, but it represents the lifeblood of those devices. You can’t imagine those devices without your music, games and videos. There’s a reason why all the tech blogs try to tell you what apps you need to buy on Christmas day: because so many people get iOS devices on those days and immediately want to start downloading apps, videos and music.
Ask Google how easy it is to launch a music playing/sharing service. Ask Android vendor Samsung or HTC.
We don’t even talk about the market share that iTunes possesses because it’s really its own category.
So how important might iTunes become?
The answer to that is the same answer to how prevalent iOS devices will become. At last week’s iPad launch event, Tim Cook remarked that more than 315 million iOS devices have now been sold. That compares to the 300 million Android devices that it has “activated.”
In 2011, Apple sold 172 million iOS devices. So, more than half of all iOS devices out there in the universe were sold in the last year.
On the one hand, if I own multiple iOS devices myself, I get to share my apps, music and games across my devices. Therefore, the amount of iTunes revenue per iOS user shouldn’t increase linearly with the number of devices sold. However, when I have more devices, I’m much likelier to learn about, participate with, and buy stuff from iTunes.
Even more important for Apple, I’m also likelier to buy some of Apple’s newer product offerings like iTunes Match and iCloud, just so I can keep everything straight among all of my devices.
And, with all these devices and content that’s shared, I’m far less likely to wake up one day and decide I’m going to drop everything and move over to the Android system.
Where is iTunes going to go next?
If Apple is able to maintain 60% market share in tablets, as well as 30% share in smart phones, it is not unreasonable to assume that iTunes could be a $32 billion a year business for them by 2015.
In fact, that might be underestimating things.
Consider that Apple is widely expected to launch its own TV next year and, just last week, announced an updated 1080p version of its Apple TV box. iTunes plays a central role in Apple TV. Essentially, a version of iTunes is your interface to your content. That’s a powerful layer.
Apple becomes an easy way for you to get at your videos and shows that you want to consume on your TV, as well as using features like AirPlay to watch your own photos and videos on your different devices.
Suddenly, video content might become a much bigger mini-revenue stream for Apple within the iTunes business. iTunes Match is also clearly going to grow revenue for iTunes this year compared to prior years.
This forgotten business is something that other companies would kill for.
Although we think that the biggest issue shareholders want Apple management to consider now is issuing a dividend, imagine what happens when iTunes becomes a $30 billion business. There will be many people crying that Apple needs to spin-off this forgotten man business, so it can receive the proper valuation it deserves to have.
That will be a high-class problem for Tim Cook and Peter Oppenheimer to deal with.