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Apple's App Store isn't such a money-spinner after all – but is that surprising?

Occasionally people try to deny self-evident realities about the world, especially regarding finance and business. (Fill in your own joke about your personal least favourite MP.) But in the wider world where business strategy matters, understanding what really makes money - as in, profit that you can retain - and what doesn't is the difference between success and repeated failure.

There's been a lot of self-deception around in web 2.0-land about what you can get people to pay for; it turns out that tearing down the barriers to stuff that people were actually happy to pay for isn't so clever (I'm looking at you, Friends Reunited: you had a great business model - one that generated revenue - and you slaughtered it on a stone table.)

Thus I always find it interesting when people try to tell me that what Apple should really do is accept that it's a software company, which makes this fantastic operating system called OS X (the space between the S and X is really important to some people), and so it ought to licence Mac OS X and offer it to Dell and HP and anyone else who wants to stick it onto a computer.

Well, let's see how much of a software company Apple is. Let's start with the newest stuff, which is some detail calculated by Jeremy Liew of Lightspeed Venture Partners about how much Apple has made from the iPhone App Store.

Yes, the App Store, which has seen a billion - a billion! - downloads since it opened in June. Using the calculation of paid v free downloads (which are reckoned to be in the 1/15 to 1/40 range, and the estimated average cost of an app (about $2.65, he reckons, which fits with Silicon Alley Insider's own analysis, which found that the average paid-for app in the top 100 sellers - which is where pretty much all the action is - sales follow a power law, falling off radically from the top 10 to the next, and from the top 100 to the many others), Liew calculated that Apple has, with its 30% rakeoff, pulled in between $49.7m (at 1:15) and $19.4m in those nine months. Those numbers, of course, don't include the costs of running the store, which will knock at least a few million off - you've got servers to run, and people approving and disapproving apps.

Just for comparison, Apple made profits in its last three quarters (that is, nine months) of $3.9 billion. Its revenues were $26.2bn. The App Store, impressive as it might sound, is the merest flea on the elephant of revenues.

And where does Apple make its money? Hardware, hardware, hardware. The iPod, the Mac line and the iPhone. Look at its most recent quarter's results: scroll down and you'll find "deferred revenue" for the iPhone and Apple TV ranking in the billions. There's your reality: Apple makes money from hardware.

But this disconnect is quite a common one around Apple. Earlier this month there was a bizarre rumour - thank you, Techcrunch - suggesting that Apple was going to buy Twitter. (Techcrunch suggested it had come from "someone who's been hired at a senior level at Apple", which led to one of our followers on Twitter to remark sarcastically "Sure, because Apple hires all the best blabbermouths".)

Well, people got a bit excited, so we tried to throw some cold water onto it (in common with all the other reality-based journalists). The Fortune Blog did the best job, pointing to a list of "companies people have excitedly said Apple is going to buy" and contrasting it with a list of companies Apple actually has bought. On one side: Twitter, Universal Music, Sun Microsystems and plenty more. On the other: PA Semi, PowerSchool, Emagic and plenty more. Guess which is the real one?

That's the problem with the adoration around Apple: so often, it's not reality-based. I don't know why; people have for years expected it to produce a tablet computer (it hasn't) or a netbook (it won't, certainly not this year). They expected an iPhone for years and years, before Apple hadn't a single staffer specialising in mobile phone software.

I'm genuinely puzzled by it, but I don't think it's going to end any time soon. However, if anyone tries to tell you that the iPhone is just a tail being wagged by the App Store dog, and that that's where Apple is really making its money... just quote that $25m to $40m figure to them. Sure, there are startups out there - hello Twitter - that would sell their grandmothers for turnover like that (if they haven't hocked her already to pay the server fees). But it doesn't matter to Apple, which after Sony's dismal results this week can legitimately claim to be the most successful consumer electronics company out there. Ten years ago, you'd not have thought that was in its future.