The iTunes/iPod Combo as a Reverse Razor/Razor Blade Business Model
According to the Economist ($):
Apple makes its money from sales of the iPod, not sales of music; the printer, not the cartridge; the razor, not the blade. As Bill Shope, an equity analyst at JPMorgan, puts it, the music store is a “loss leader” that serves only to boost sales of the iPod. It is as if record stores existed only to sell record players. How vital is this loss leader? Mr Shope points out that iPod sales took off after the store was launched in April 2003. That said, only a small fraction of the stuff on a typical iPod comes from Apple’s store. Most of it is still copied from CDs and some is acquired through file-swapping technologies such as BitTorrent. People do not become iPod customers to take advantage of the iTunes music store. But, argues Mr Shope, the store may be an important reason why they stay customers. Because the music store is only compatible with the iPod, a customer who wants to abandon Apple’s player in favour of something else must replace all the music he downloaded from the store. It is as though a person’s entire record collection worked on only one brand of gramophone. Hence with each song a customer buys, he binds himself a little more tightly to the iPod. Apple offers its customers a “Trojan horse”, according to Mr Shope. Customers embrace its iconic device, and then, like the hapless Trojans, find they have fallen into the hands of the gift-givers.Note that the “trojan theory” rests on the assumption that (i) the iTunes songs won’t be available in an open standard format; and (ii) that no competitor is willing to internalize the customer’s switching costs. While (i) is probably a given, at least for now, (ii) has recently been called into question.
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July 21st, 2006 at 8:59 am
[…] From an antitrust perspective, DRM that restricts the choice of music player can create market power because they function as a technological lock-in: take Apple’s iPod, which will only play music downloaded from the iTunes Music Store, tracks ripped from a CD, or mp3 files without DRM protections (hence Yahoo’s claim that A Public Affair will play on any player). On the official Yahoo music blog, director of product management Ian Rogers wrote: “As you know, we’ve been publicly trying to convince record labels that they should be selling MP3s for a while now. […]