Robert Cringely asks if the iPod is the razor or the blade, drawing an analogy to Gillette's marketing innovation over a hundred years ago.
Gillette's marketing breakthrough was selling the razor handles at little or no profit while making huge profits on the consumable -- the blades. This same technique is used today to promote mobile phones and inkjet printers. And it is supposedly behind Apple's success with the iPod music player.
But in the case of Apple, is the iPod a razor or a blade? In other words, is Apple a hardware company or a media company?
I think they are a hardware company, but one very well-informed reader with whom I've been discussing this disagrees.
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.
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+.
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.
But he also provides a counterpoint from one of his readers.
"I see your point on the iPod being the razor, but we thought of it more as the blade since it is essentially the disposable item. You will constantly be upgrading your iPod, much like you buy improved razors and as you point out, the music file should last indefinitely..."
"As for Apple being in the content business, let me offer a comparison. In the 1970s, Motorola used to tell people it sold technology. You talked to any of the SPS engineers, production control managers, marketing people, etc., at their facilities and operations in Phoenix, and they would say that 'we make and sell technology.' But between 1978 and 1982 they stopped saying that. They began to say 'we provide the technology.' That subtle shift in language reflected a change order of magnitude. Technology migrated from being a product to being the process (an enabler) by which things happened.... It seems to me that Apple is now making that shift. They appear to recognize that digital or electronic technology is no longer a product but a process, an enabler of activities rather than the activity itself. When I bought my first computer, I was buying a computer. Sure I wanted to write programs to do things, and use software that did things, but fundamentally I was buying a product that was about the product."
He then follows up on his previous article which speculates that the new Mac Mini is all about movies. He suggest that a video distribution service from Apple (like the iTunes audio distribution service) based on the Mac Mini as a high definition movie machine (like the iPod is to music) is likely to be in the making.
Fascinating stuff - another sign of the revolution in the making in the area of content business models.