Does Apple's Fast-Growing Side Business Matter?

In December 2013, Apple App Store downloads were up 50% from December 2012, according to a new press release from Apple. While the business contributes just a fraction of sales to Apple's top line, that fraction is growing. Could Apple's iTunes business soon begin to have a meaningful impact on the bottom line? Probably not. But that doesn't mean the segment doesn't play an important role.

First, let's take a look at the segment's growth.

Apple's growth segment
For the most part, Apple is not regarded as a growth company -- and rightly so; Apple's earnings per share in the fiscal fourth quarter of 2013 were actually down about 5% from the year-ago quarter. While revenue ticked higher, the gain was only marginal, up about 4% from the year-ago quarter.

But all it takes is a quick glance at Apple's product segments to see one irrefutable area of growth. Sales from its "iTunes/Software/Services" segment, which includes "sales on iTunes Store, the App Store, the Mac App Store, and the iBooks Store, and revenue from sales of AppleCare, licensing and other services," is still growing rapidly. In fact it was Apple's fastest growing business in Q4, up 22% from the year-ago quarter.

Apple's latest press release gives us some new details on just how rapidly the business is growing.

  • Revenue from the App Store topped $1 billion in December alone.
  • Apple boasts $10 billion in App Store revenue in the full calendar year of 2013.
  • In December, customers downloaded "almost three billion apps," up about 50% from last December's "over two billion downloads."
  • Developers have been paid a total of $15 billion by Apple, $8 billion in 2013 alone.

As Fortune's Philip Elmer-DeWitt points out, Apple keeps a 30% share of App Store revenue, so the store has essentially brought in more than $21 billion since its inception about five years ago.

Apple guru Horace Dediu illustrates the powerful growth in App Store downloads in one chart:

A break-even segment?
Though we can't be sure it's still the case, Apple has traditionally run its App Store at break-even. If this is still the case, this fast-growing portion of Apple's iTunes business may not really be contributing a substantial profit to the company's bottom line -- if any.

But does this mean the App Store growth has no value to Apple? Not at all. Apple's loyal customer base is dependent on a healthy ecosystem of apps and services. It's the intersection of blockbuster products, software, and services that keeps customers coming back.

And for investors, Apple's rapidly growing app business is evidence that the company's customers are still actively engaged with its products. In fact, in most cases, Apple's customers are probably more engaged with its products than competitors' customers are with theirs.

Editor's note: A previous version of this story contained an inaccurate number for App Store revenue in 2013.

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