[gambiting]

>>The vast majority of Apple's profit comes from the ridiculously high margins on their hardware.

I am not saying you are wrong, but could we see a source for that please? I always assumed that no matter what they do, the profit margin on hardware cannot be THAT large, because the costs of R&D and marketing for apple devices must be huge(they ship with their own in-house developed operating system,after all), so I always assumed that Apple makes most money off platforms like iTunes, not hardware profits. I would be very happy to be proven wrong though.

[exelius]

I don't have an explicit source; but we can back into the numbers. Apple only breaks out COGS for the entire company; not by division. But regardless, the iTunes division is dwarfed by the iPhone/iPad/Mac divisions. Apple's gross margins are right around 37.5% -- which is very high. The average for the computer/electronics industry is closer to 20%. If you look at historical trends through their past SEC filings, you'll see that margins have actually been declining, and that iTunes was only a significant percentage of revenue for the last couple of years. It was less than 1% of revenue before 2007, so it operated as a very small part of the company for the first 10 years of its existence. Online media direct sales are actually not as big of a business as you might think -- for example, Steam alone did more revenue than the entire online movie sales/rental business (not counting subscription services).

As a percentage of revenue, Apple's operating expenses (which include R&D and the operation of the Apple stores, servers, etc.) are pretty low -- less than 10%.

All of this info comes from Apple's 10-K: http://investor.apple.com/secfiling.cfm?filingID=1193125-13-...