Monday, August 09, 2004

Tethering vs. Tying

Apple’s choice to close the iPod to competing, protected formats,
combined with their expressed business model around the iTunes/iPod combination,
plays counter to traditional tied business models. Normally, the hardware is
sold at cost while the “software” (razor blades, ink cartridges, music) is sold
at a profit. Instead, Apple has claimed that selling music is profitless, while
selling hardware holds the long-term profit potential. Given this agenda, it
would seem counter-intuitive that Apple would object to any party being able to
play the files of their choice on the iPod. The more iPods sold, the better.


Apple’s response over the next few weeks
could reveal a surprise: the long-term success of the iTunes/iPod platform is
dependent upon margins in both worlds - music and hardware. While music is sold
with little margin, the promotional value of the store pathway is worth money.
Over time, Apple’s ability to squeeze large margins out of iPod sales will
diminish with the growth of competing players, stores and services. The company
needs both products, iTunes and iPod, to offer a financial return.

Tethering vs. Tying - Features - features.engadget.com

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