Apple's Forgotten Business: iTunes

NEW YORK ( TheStreet) -- With so much going on these days at Apple ( AAPL), it's easy to forget about its little business called iTunes.

In Apple's fiscal 2011, iTunes represented 6% of its net sales, coming in at $6.3 billion.

In the most recent holiday quarter, iTunes clocked $2 billion in revenues. To put that in comparison, in that same quarter, Facebook did $1.1 billion in revenue. Even Google ( GOOG) overall only did $10 billion in revenues for the quarter.

iTunes is not a sexy product like iPhone or iPad, but it represents the lifeblood of those devices. You can't imagine those devices without your music, games and videos. There's a reason why all the tech blogs try to tell you what apps you need to buy on Christmas day: because so many people get iOS devices on those days and immediately want to start downloading apps, videos and music.

Ask Google how easy it is to launch a music playing/sharing service. Ask Android vendor Samsung or HTC.

We don't even talk about the market share that iTunes possesses because it's really its own category.

10 Mid-Cap Stocks That Have Almost Doubled in 2012

So how important might iTunes become?

The answer to that is the same answer to how prevalent iOS devices will become. At last week's iPad launch event, Tim Cook remarked that more than 315 million iOS devices have now been sold. That compares to the 300 million Android devices that it has "activated."

In 2011, Apple sold 172 million iOS devices. So, more than half of all iOS devices out there in the universe were sold in the last year.

On the one hand, if I own multiple iOS devices myself, I get to share my apps, music and games across my devices. Therefore, the amount of iTunes revenue per iOS user shouldn't increase linearly with the number of devices sold. However, when I have more devices, I'm much likelier to learn about, participate with, and buy stuff from iTunes.

Even more important for Apple, I'm also likelier to buy some of Apple's newer product offerings like iTunes Match and iCloud, just so I can keep everything straight among all of my devices.

And, with all these devices and content that's shared, I'm far less likely to wake up one day and decide I'm going to drop everything and move over to the Android system.

The Most Popular Free iPad Apps Ever

Where is iTunes going to go next?

A recent study estimated that 500 million units will be sold by 2015. Another study stated that the number of smart phones sold by 2015 could be 1.5 billion.

If Apple is able to maintain 60% market share in tablets, as well as 30% share in smart phones, it is not unreasonable to assume that iTunes could be a $32 billion a year business for them by 2015.

In fact, that might be underestimating things.

Consider that Apple is widely expected to launch its own TV next year and, just last week , announced an updated 1080p version of its Apple TV box. iTunes plays a central role in Apple TV. Essentially, a version of iTunes is your interface to your content. That's a powerful layer.

Apple becomes an easy way for you to get at your videos and shows that you want to consume on your TV, as well as using features like AirPlay to watch your own photos and videos on your different devices.

Suddenly, video content might become a much bigger mini-revenue stream for Apple within the iTunes business. iTunes Match is also clearly going to grow revenue for iTunes this year compared to prior years.

Poll: Would You Buy an Apple iPad Mini?

This forgotten business is something that other companies would kill for.

Although we think that the biggest issue shareholders want Apple management to consider now is issuing a dividend, imagine what happens when iTunes becomes a $30 billion business. There will be many people crying that Apple needs to spin-off this forgotten man business, so it can receive the proper valuation it deserves to have.

That will be a high-class problem for Tim Cook and Peter Oppenheimer to deal with.
At the time of publication, Eric Jackson was long AAPL.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at or @ericjackson.

You can contact Eric by emailing him at

If you liked this article you might like

Tech Stocks That Look Fairly Cheap Following the Rout

Tech Stocks That Look Fairly Cheap Following the Rout

Cramer: Today Was Just Awful

Cramer: Today Was Just Awful

Facebook Leads Sharp Decline of FANG Stocks This Week
Why the Worst May Be Over For Facebook

Why the Worst May Be Over For Facebook

Risk of More Downside Is High as Bears Finally Have Some Momentum

Risk of More Downside Is High as Bears Finally Have Some Momentum