In the past, equities analysts and journalists have offered estimates of iTunes' contribution to Apple's bottom line. For whatever reason, however, most people have been content to stick to urban myth that says iTunes merely breaks even (even if that was the case, it helps drive the sales of very profitable hardware). That myth has many faults, the most egregious being an assumption that each track sold carries with it its own credit card processing fee (hardly the case) that eats up the $0.30 gross margin per $0.99 download.

In the New York Times' Bits blog, Saul Hansell makes a case that iTunes may be Apple's best business segment.

Here’s what the iTunes store has: margins that are better than the best e-commerce companies around; no marketing costs and a built in audience; Sales of nearly $3 billion a year in its existing business; and a new $1 billion business on the way.

The analysis:

Let me modestly suggest that far from being a break-even proposition to lure hardware customers, iTunes may be the best business that Apple has.

While the "no marketing costs" assertion is an exaggeration -- one should include the considerable expense of television ads that tag both iTunes and the iPod, for example -- it's probably not far from the truth. There may be no more cost-efficient way to sell music -- especially with the huge scale the store enjoys. Additional revenue from videos and apps will make it only more profitable.

Hansell's analysis was to compare iTunes to Amazon.com and eBay, and it did not offer an estimated operating margin or back-of-the-envelope income statements. But other have done this. Last year, PacificCrest analyst Andy Hargreaves estimated iTunes' operating margin to be 10% and possibly as high as 15% (it would be better today due to the increases in volume). Earlier this year, Billboard's Ed Christman estimated $161 million to $390 million of operating profit on revenue of $1.9 billion. That comes out to an operating margin of 8.5 to 20%.

Whatever the true operating margin, we can safely assume iTunes is making money hand over fist. Steve Jobs might downplay its success, but we shouldn't.