Are Apple’s ‘iPod’ and ‘Mac mini’ the razors or the blades?

“More than a century ago, King Gillette invented both the safety razor and a new way of marketing consumer goods. Before Gillette, men shaved with straight razors, which required skill to both make and use, and lasted almost forever. Gillette’s safety razor was mass-produced and required little skill to make OR use, but couldn’t be re-sharpened, so the removable blades had to be discarded when they became dull. His marketing breakthrough was selling the razor handles at little or no profit while making huge profits on the consumable — the blades,” Robert X. Cringely writes for PBS.

“To me, it seems that Apple has reversed the relationship of razors and blades, and eliminated the loss leader role entirely. Apple makes very little money from selling songs, but it does make some profit. Apple makes a LOT of profit from selling iPods. So the song is the razor, not the iPod, and that’s because the price sensitivity is currently about the content, not the player,” Cringely writes. “Apple’s margins on the iPod Mini are about 30 percent from the retail channel and 60 percent through its own stores, so let’s say that’s an average of 35 percent or $75 on an iPod Mini. Apple makes about $0.20 on each song. So to make more money from the songs than from the iPods they’d have to sell 375+ songs per iPod. Apple has sold 250 million songs to date and has sold 10 million iPods. That is 25 songs per iPod, not 375+.”

Cringely writes, “How long does a digital song last? If the customer is careful, it should last effectively forever. How long will an iPod last? The life expectancy of a mobile phone is 18 months and the life expectancy of a PC is 3-5 years. I’m guessing the life expectancy of an iPod will be something in-between, on the order of three years. That means Apple can expect to make the profit equivalent of 375 songs every three years from selling a new iPod to each old customer.”

“So Apple isn’t in the content business, they are in the hardware business, and will be for sometime to come… Steve Jobs and Apple have definitely hit a sweet spot in the music market, doing what King Gillette could never dream to — make money on all parts of the deal… Let’s further consider [Apple’s new Mac mini] in this same light,” Cringely writes.

Full article with much more, a very interesting read, here.

17 Comments

  1. There are other significant differences between iPod/iTMS and razors/blades.

    Once patents expired, any manufacturer could make either the razor or the blade to replace the corresponding Gillette (now Proctor Gamble) component. That won’t be true with the iPod and iTMS. Once you start buying songs from iTMS, you must use the iPod to play them at their original size and fidelity. Similarly, once you buy an iPod, there’s no use buying from any other music store since the other store’s songs won’t play on your iPod at their original size and fidelity. That’s why Jobs is supposedly quoted as saying that Apple likes DRM regardless of the record companies. (I can’t believe he would say that with a reporter around, but it makes sense.)

    So Apple is locking in both the razor and the blade once you purchase one or the other.

    Secondly, you don’t need to buy iTMS music once you buy an iPod and you don’t need an iPod to play iTMS music. I have a 40 GB iPod and a shuffle, yet I’ve never purchased any iTMS music. A friend of mine, using one of my obsoleted computers, doesn’t have the money to buy an iPod, but she has bought a few songs on the iTMS to play on her computer. (She’s thinking hard about the shuffle.)

    Tangentially, I recall (but do not have the link for) an analyst claiming that Apple will eventually make more revenue from iTMS than from iPods on an annual basis. That being the case, the razor/blade analogy might fail completely. An amazing business model.

  2. BuiredCaesar – don’t count on it… I rode Apple through last year – I think this year will be just as good. I’ve recently bought 5000 more shares. This is the end of the beginning, not the beginning of the end, for the stock’s meteoric rise. No reason why the stock can’t double again, given a doubling or trebling in Apple’s market share over the next 24 months, should the mini take off. Not that unreaslistic considering its only some 2% now!

    It might be rocky though, given that gross profit margins are bound to show a decline due to the mini and the shuffle having lower margins but likely to be the best sellers. Analysts won’t like a drop in gross margins, even if accompanied by a massive rise in sales. Gives them the jitters. But those blips will soon be worked out providing the company can consistently deliver growth and capitalise on all the positive newsflow its generating now. If they screw this up, the company’s finished – nobody will take them seriously again – but I have a feeling they’re playing to a much bigger picture than anybody is guessing at, and will deliver a string of surprises over then next few yesrs, at the consumer, professional, and enterprise levels.

    AAPL is my Ferrari fund – if it all goes wrong, I can always buy a Mini Cooper S though ” width=”19″ height=”19″ alt=”grin” style=”border:0;” />

  3. P&G (Procter & Gamble) are set to buy out Gillette for $55 billion with the resulting job losses in the Boston area.
    Remember my prediction of a share market adjustment (crash) in late 2006 unless the Bush Government changes its fiscal policy which is highly doubtful at the moment.
    But its all roses for Apple these days as my AAPL shares increase causing a nice smile on my face.

    Funny my magic word is “costs”. Are you reading this Bush.

  4. Apple has to be making a killing on iPod sales. I refuse to believe that the iPod profit is only $75/ea. If they can package a comparable harddrive, with an optical drive, video capabilities, firewire/usb, audio, and an entire OS with a complete productivity sweet for $500, then they have to be able to produce and sell a hardrive in a simple case and a monochromatic screen (for the majority of models) for well under the current market price.

  5. A well-written article (for once).

    I have always had the nagging suspicion that Steve & Co. were in the processes of lining up something spectacular. Apple has all of the very best technological parts in computing as well as media production; all are leading edge and very consumer-friendly. Steve’s playroom has the best in home WiFi, H.264 compression, 64-bit processors, secure/stable UNIX, and a secure and highly popular media distribution model (iTMS). Who else can brag that they have the very best in pro media software (Final Cut, iDVD Pro, Logic Pro, etc.), their own server and super-computer level processors, and a consumer line of hardware and software that includes $499 computers and a $99, 1oz., music player?

    We are constantly barraged with article subjects about… can Apple’s OS beat Microsoft’s? …can Apple’s computer beat Dell’s? …can Apple’s music player beat Sony’s? …can Apple’s music store beat Napster’s? …can Apple’s super-computer beat IBM’s? Apple has never stepped into a market with just a “me too” presence. In just about everything that Apple touches, they beat their competition, and there is absolutely NO ONE ELSE so successful in fighting so many battles on so many diverse fronts!

    I have no doubt that Apple will soon glue these all together into a central media/data solution; not just a lame set-top box, but the entire process from media production, transmission and sales, as well as on the consumer end. Not unlike the Mac, where hardware and software are unified into a single smooth system, this complete media production model will be very smooth, extremely high quality, and be able to bring to the consumer a low cost, sleek and simple, source for entertainment and data.

    People are examining the individual pieces in Apple’s jig-saw puzzle of products, arguing and analyzing the competition in the individual markets, and no one is seeing what can be formed if you put it all together.

    No other company sits in such a potentially powerful position than Apple is at right now. Just as GE in the US (and Siemens in Europe) makes everything from the power plants and transformers to heart monitors and 40w light bulbs, Apple is in a prime position to do the same with computing, media, and telecommunication* technology.

    *Apple in telecommunication? Yes. Telecommunication is just media going both ways. While most telecom companies spoon feed their customers with features built onto their existing platform, Apple can provide an all new level of quality and speed in telecommunications by merely applying their existing computing and media knowledge. Once again, it is just taking the pieces they already have and connecting them in a different way… wireless, hi-res H.264, iChat on a small pocket device is no big deal at Apple, but scares the hell out of AT&T.

    Take a look here and tell me that Apple’s Tiger isn’t ready to pounce…
    http://www.apple.com/mpeg4/

Reader Feedback

This site uses Akismet to reduce spam. Learn how your comment data is processed.