Why iTunes doesn't matter (much)
This morning's early trading has Apple (AAPL) stock recovering most of the loss it took yesterday after reports that iTunes sales had dropped precipitously. This correction makes sense, for two reasons. One, the Forrester report indicating that iTunes sales dropped by a scary-sounding 65 percent was not quite as gloomy as it seemed. The ratio of iTunes sales to iPod sales has never been especially high, and if you read the fine print of the report, it actually indicates that the ratio is up slightly, to an average of 22 songs per iPod sold.

But secondly, and much more importantly, Apple doesn't need to sell iTunes to make money - and it never has. Back in 2003, Steve Jobs admitted in a Time magazine interview that "the dirty little secret of all this is there's no way to make money" selling music online. As Time's (now Business 2.0's) Chris Taylor put it: "For every 99 cents Apple gets from your credit card, 65 cents goes straight to the music label. Another quarter or so gets eaten up by distribution costs. At most, Jobs is left with a dime per track, so even $500 million in annual sales would add up to a paltry $50 million profit. Why even bother? 'Because we're selling iPods,' Jobs says, grinning."

Real investors will keep the focus on the important number: Apple has sold 67.4 million iPods and counting. The Apple music strategy is akin to the classic razor business model: sell people the blades, and you can give the handles away.
Posted by Jim Ledbetter 10:10 AM 6 Comments comment | Add a Comment

"The Apple music strategy is akin to the classic razor business model: sell people the blades, and you can give the handles away."

No it's not. If that were the case, Apple would be breaking even on the iPod (the handle), and maximizing profits on songs sold (the blades). As your article details, it's actually the opposite. A good example of the razor business model (aside from razors themselves of course) is the video game industry. Microsoft and Sony sell their consoles (handles) for a loss, and recoup their costs on the games (blades).
Posted By David Martin, Raleigh, NC : 12:33 PM  

Looking at the breakup of the $0.99/song cost you missed one major player. The credit card companies who own the tranmission access lines when buying online.
Posted By Mark, San Diego : 12:57 PM  

This is exactly opposite of the razor business model. Apple is making money from the handles, and is giving the blades away.

Apple's challenge will be to convince people to upgrade their blades once everyone already has one.
Posted By Ken, Oviedo Florida : 1:46 PM  

And another analogy (razors and blades) is the ink-jet printer business. Sell people the ink, and you can give the printers away. In fact, many low end printers are free after factoring in the mail in rebates.
Posted By Titus : 6:36 PM  

Re: convincing people to upgrade their 'blades'.

Another model might be to have the 'blades' break after two years...
Posted By Thomas, Corvallis OR : 7:31 PM  

Steve Jobs better start focusing on fixing all of the technical glitches with his iPods or he won't be selling many of them in the future. Why isn't anyone covering that story?
Posted By Laura, Washington, DC : 10:18 AM  

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