According to a recent report, iTunes costs $1.3 billion a year to run, which upon first glance seems way too high. I mean, what does iTunes really do? Sure they host a few songs, sell a few apps, and pop-out an update every time you turn on your computer (along with a complimentary update to that program you’ve never actually used, Quicktime), but c’mon, none of that costs $1.3 billion, right? At that’s what I thought until I found a report showing iTunes sales as follows:

• 15 billion songs

• 130 million books

• 14 billion apps

• 100,000 games and movies

Assuming every song is only 3mb in size; iTunes has transferred over 45,000 terabytes of information. iTunes internet bill may be just a little bit on the extravagant side. The cost of running iTunes doesn’t actually seem all that outlandish when you look at the numbers and despite the large upfront costs; surely iTunes is raking in the profits. At $1.29 a song and with fifteen billion songs having been sold, that is quite the they have going on, but wait, what’s that Peter Oppenheimer?

The CFO of Apple has stated over and over that iTunes barely breaks even. Peter Oppenheimer claims that iTunes primary function is to help promote sales of their iPhone and iPod. So with Apple only charging the minimum they need to in order to in order to maintain their system, where is the other $13 billion plus going? It’s certainly not the artists. Information is Beautiful put out one of the best charts there is on the subject. For every dollar spent on iTunes, 9 cents goes to the artist, 30 cents to Apple, and the rest to the record labels.

The artists do most of the work in creating the album, but have to sell roughly 12,000 songs a month to make minimum wage because Apple had to give into the labels (and that’s assuming there is only one person in the band). The real problem started years ago when Shawn Fanning got the idea for Napster. Napster allowed music to be distributed in an unprecedented way; music flowed from person to person without oversight or regulation. The major labels were not amused. The labels viewed the first major digital distribution model as a threat. Without receiving heavy financial compensation from Napster, the labels could not have hoped to survive so they did what they know how to do best, they sued.

Flash forward a few years to the emergence of iTunes. Napster caused the labels to fear the potential of digital distribution. Instead of embracing digital distribution as the way of the future, the labels resisted as best they could. So when Steve Jobs approached them explaining how iTunes would allow them to make a profit, they were a bit skeptical. Eventually the labels consented, but they no longer simply wanted to make a profit, they wanted a fortune. In exchange for the rights to distribute music, iTunes had to agree to give the absurd amount of 60% of sales to the labels. Thus with iTunes needing at least 30 cents a song to stay viable and labels demanding 60%, the cost per song was set at $0.99 with artists getting the remaining $0.09.

The artist makes the music, records it, and tours the nation promoting it. iTunes pays for the server space to store the music and writes the software that allows for customers to find and buy it. The labels…well they…um…act as the middle man? Given the distribution of work it makes perfect sense that the labels are making the largest profits from music sales. It appears 60% is the fee to hold back an army of lawyers these days.

I'll just take my piece...

Agree or disagree? Do you think labels deserve their cut of the sale or should more of it be going to the artists? Comment below.

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