Wonder how Amazon can sell digital albums at $3.99 or less? A chart at Business Insider has the answer. Amazon has an annual average revenue per user (ARPU) of $189, according to J.P. Morgan's math. That figure comes from the company's financial statements and comScore's estimate of unique visitors. J.P. Morgan did not estimate Amazon's average revenue per customer. Since it could have more customers than unique visitors, average revenue per customer could be even higher than ARPU.
As those numbers show, Amazon is simply in good position to engage in loss-leading pricing. It wouldn't work at the other Internet sites on the chart. Amazon's ARPU is 385% more than eBay's $39 ARPU, 688% more than Google's $24 ARPU, and a whopping 4,625% more than Facebook's $4 ARPU. While Amazon might lose a little money at $3.99, there is clearly value in getting people to the store and keeping them shopping.
Actually, Amazon's U.S. ARPU is probably better, because J.P. Morgan's estimates are based on global revenue and global users. According to my math, Amazon's North America ARPU was around $226 in the 12 months ended Sept. 30, 2010. In the 12 months ended Sept. 30, Amazon's North America revenue was $16.45 billion. Average unique visitors during that time was 72.7 million (calculated as an average of September 2010 U.S. uniques of 76.7 million and October 2009 uniques of 68.7 million, according to comScore).
The numbers carry with them a striking implication: there just isn't much advertising revenue for the current record business at major search companies or social networks. (Notice I threw in the word "current" there. Tomorrow's record business may be forced to have very different economics.) If you allow Google, for example, to distribute your music in exchange for a share of ad revenue, there's not going to be much revenue to split between all parties. Of course, that's not to say Google couldn't open a successful music download service or Facebook users would not buy downloads and CDs through third-party storefronts.
The financial math for downloads and search/social may not work out right now, but less expensive streaming is less daunting. After all, what Google and Facebook lack in ARPU they make up for in sheer number of users. According to comScore's figures for November 2010, Google sites had 178.7 million U.S. users and Facebook had 151.7 million U.S. users. Even small bits of revenue from huge user bases like those can become significant sums.