Why iTunes Sales Are Declining as iOS App Store Sales Grow

Mario Tama / Getty Images

Mario Tama / Getty Images

The revenue of Apple’s (NASDAQ:AAPL) iOS App Store has continually increased, and now has caught up to the revenue from the iTunes Store. As Mashable reports, Jackdaw Research found that iTunes users spend as much on apps as they do on music. A category Jackdaw’s chief analyst, Jan Dawson, identifies as a key growth area for Apple is called “iTunes, Software, and Services.” The category is comprised of content and apps sold on iTunes, software like Final Cut X, and services like iCloud and AppleCare.

While iTunes revenue, comprised of sales of music and movies, accounts for the largest percentage of the category, Jackdaw’s report shows that sales of music and movies have declined while app sales have increased dramatically. The average amount of money that users spend on apps each year is also increasing, and in the fourth-quarter of 2013, the average amount of money spent on content was about the same as the amount spent on apps.

As Mashable’s Christina Warren notes that the report reveals the huge potential for app sales to grow in the future: “Apps revenues in Q1 2014 is basically where digital content revenues were in Q3 2010. That kind of sharp shift shows huge potential for growth, even if content revenues continue to drop.”

AppleInsider reported in May that the App Store’s revenue was on track to surpass iTunes sales of music and movies by the fourth-quarter of this year. In the fourth-quarter of 2013, iTunes revenue represented 59 percent of Apple’s online services revenue, and App Store sales represented 41 percent. In the first-quarter of 2014, that balance had shifted slightly, with iTunes revenue at 57 percent and App Store revenue at 43 percent. At the time, Morgan Stanley (NYSE:MS) analyst Katy Huberty projected that iTunes’ share would decline to 47 percent in the fourth-quarter of the year, leaving the App Store with 53 percent of online services revenue.

Morgan Stanley’s research suggested that iTunes customers are spending less than they used to, a finding consistent with Jackdaw’s report. It’s likely that some of the dollars that previously went to purchasing music and movies from iTunes are now going to competitors like the subscription services offered by Spotify, Pandora (NYSE:P), Netflix (NASDAQ:NFLX), and others. More users are opting to pay on a monthly basis to access the content they choose, rather than buying songs and movies individually. It’s possible that Apple’s acquisition of Beats Music could help it to compete with streaming subscription providers and make up for some of the decline that iTunes is experiencing.

Huberty also noted that according to Morgan Stanley’s research, the App Store surpassed iTunes in average billings per year in 2012, with the gap between the two widening since. She also pointed to the different operating margins of the App Store versus iTunes, estimating that the iTunes Store has 15 percent operating margin to the App Store’s 46 percent, which could have a significant impact on Apple’s online services revenue as the App Store’s growth takes off.

The research shows how important App Store sales are to Apple as it seeks to offset falling iTunes revenue. Apple is truly entering the age of the app, and App Store sales will become increasingly critical as iTunes sales continue to fall. As App Annie reported on the App Store’s recent sixth anniversary, the App Store has grown from 500 apps in July 2008 to 1.2 million apps available today. As App Store revenues surpass iTunes revenues by the end of the year, it will be interesting to see how far iOS apps can follow its trajectory of growth, a direction that isn’t likely to reverse anytime soon.

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