25 Billion App Downloads… And Counting

Apple’s (NASDAQ:AAPL) app store reached a new milestone of 25 billion downloads Monday. ^[1] This is the cumulative figure of all the downloads done from the App Store so far. In comparison, Google’s (NASDAQ:GOOG) Android market reached 11 billion downloads in January this year. That a Chinese national, Chunli Fu of Qingdao, downloaded the 25 billionth app is symbolic of the rapid strides Apple is making in terms of global reach. Apple now has users from over 120 countries across the world downloading from the App Store.

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Apps set scorching pace

The iOS App Store has grown at a phenomenal rate over the past year. It took Apple almost two and a half years to reach 10 billion downloaded apps, which it did in January last year. But since then, more than 15 billion apps have been downloaded in a little over 14 months, setting an impressive pace of one billion apps downloaded every month. Apple reached the 15 and 18 billion mark in July and October respectively last year. The increasing popularity of the iPad and the impressive demand for the iPhone 4S are primary factors for the high volume of apps being downloaded. Increased penetration in China will see an even higher rate of downloads this year.

Not a profitable business…?

While the volume of apps being downloaded is undoubtedly impressive, Apple hardly turns a profit on this business. So far, Apple has paid about $4 billion to the developers. ^[2] Since developers take a 70% cut of the app sales, the total revenues that the app store has generated so far is about $5.7 billion. About 3 billion of that figure came in the last year alone. But Apple doesn’t keep the rest of the 30%. Credit card and other processing costs brings Apple’s gross margins down to about 15-16%. Operating expenses in terms of marketing and other costs take up another chunk of the profits, leaving Apple with a cash profit of about 350 million in 2011 by our estimates.

2011 was a good year for the App Store in terms of not only increased downloads but also an increase in average App pricing as a good number of iPad apps started to figure in the overall downloads. iPad apps are typically priced higher than their iPhone counterparts since they are optimized for the bigger screen among other factors. That helped the margins a bit, pushing Apple’s gross margins a little higher. But before that, Apple’s cash profits from the app store were hardly anything to talk about.

But that isn’t why it was created

However, Apple’s intention when it started the App store was never to make it into a huge thriving business. Steve Jobs has also said in the past that he intends to run the App store at near break-even. The whole purpose of the App store is to create an ecosystem vibrant enough for customers to buy Apple’s iProducts and profitable enough for developers to use the platform for their apps. The former was the reason why the iTunes store was created in the first place for the iPod. Apple then took the concept a little further and incorporated it in the iPhone next and the iPad later. Of course, as they say, the rest is history.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Apple’s App Store Downloads Top 25 Billion, Apple Press Info, March 5th, 2012 [↩]
2. Apple Job Creation Site [↩]