“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.