An Apple a Day

This analysis by Randy Picker at the University of Chicago comes the closest, I think, to making sense of Steve Jobs’s “Thoughts on Music” post of yesterday. Apple is in a razor-and-razor blades business with iTunes and the iPod, and looking ahead it wants to sell more and higher margin razors. The future of the razor blade business looks pretty bleak.

The razor-and-blades metaphor doesn’t hold up perfectly, though. I’ll push in a couple of directions at once. More below the fold.

First, in today’s marketplace, actual razor-and-blade businesses — Gillette, for example — sell (relatively cheap) razors and (relatively expensive) blades, and each company’s razor-and-blade system is proprietary to that company. (At least I’ve always assumed that’s the case; I’ve never tried to use one company’s blades on another company’s razor, and I’ve never heard of a grassroots movement for blade interoperability.) Older music-oriented razor-and-blade businesses — companies producing record players and vinyl records, for example — started out in the mode that Apple is in now, selling expensive machines and cheap inputs. Over time, the machines got cheap; the records stayed relatively expensive. Videocassette players started expensive and were getting cheap even before DVD players came along; videocassettes themselves came down in price (as DVDs are now), but not as quickly, or as much. The point, in any case, is that a razor-and-blade business model doesn’t come with a single set of pricing imperatives, and whatever those imperatives are, they change over time.

Second, and more pragmatically for the moment, Apple’s interest lies in strengthening the market position for the iPod itself, regardless of where the content comes from. As Randy notes, with Apple’s DRM the iPod is a platform, and strong measures to prevent reverse engineering are in Apple’s interest to maintain its platform status. Or, in other words, in recent years Apple has taken a number of steps to position itself as a content company (cf. the purchase of Apple Corps trademarks, for example), but it turns out to be a hardware company after all. At least until the next generation of media player comes along and dislodges the iPod.

For the rest of the entertainment industry, the real lesson may be that as the price of digital content gradually gets pushed to zero, Hollywood studios should think again about taking a page out of Apple’s book. Reintegrate — not by reacquiring the production and distribution facilities that got them into antitrust trouble decades ago, but by partnering with (even buying?) hardware companies and making money from the razors (the viewing devices) while the blades (the content) become a commodity. Compete at the platform level, rather than at the application level. The National Football League found itself in hot water over Super Bowl weekend when it threatened to come down on churches that were organizing groups to watch the game on televisions larger than 55 inches across. The NFL is happy to sell you a new jersey each year. Why not sell you a giant flat screen television?

Again, it’s the paradox of digitization. Despite our immersion in virtual content, appropriable value lies, more than even, in objects themselves.