Interesting debate about the compatibility connundrum that faces ipod /itunes users - KK
Apples are not the only fruit
Jul 6th 2006
From The Economist print edition
The economics of France's attempt to open up iTunes
http://economist.com/finance/displaystory.cfm?story_id=7141363
APPLE COMPUTER prides itself on creating products that fit together without ugly joins or haphazard stitching. The iPod is a prominent example. A portable digital jukebox, it works seamlessly with Apple's own iTunes music store, a popular site for buying downloadable music. But on June 30th France's Senate and National Assembly did their best to unpick Apple's careful weaving. The law they passed is supposed to allow customers to play music bought from iTunes on one of the iPod's rivals. Consumers, the French hope, will be able to mix and match players and stores as easily as they do ties and shirts.
When signed, the law may well be ineffective. Copyright-holders may step in at Apple's behest and prevent their music being played on rival devices. If it has any effect, the law may backfire. For Apple, France is a dispensable nation. The company could quit the country altogether rather than allow its competitors to take advantage of its music store. As a result, the law may leave France's digital music-lovers with less choice, not more.
Put these practical difficulties aside, and ask whether France's policymakers identified a real problem. Are they right to worry about the inseparability of Apple's store and its player?
Such controversies normally turn on the analogy chosen to illuminate them: is the iPod like a CD or cassette player, or an inkjet printer? Since it appeared in 2001, the iPod has become this decade's answer to the Sony Walkman. Supporters of the French law point out that if you buy a music cassette at a shop, you can listen to it on any cassette player that takes your fancy. You do not have to play it on a Walkman. Why then can customers not listen to songs from Apple's music store on whatever player they like? Surely Apple is guilty of exploiting the popularity of its store to stifle rivals to its iPod?
The law's opponents reach for different analogies. They compare the iPod not to the Walkman, but to printers, games consoles and razors. Buy an inkjet printer, for example, and you must buy the manufacturer's cartridges to be sure that it will work properly. (Although French parliamentarians will not come to your rescue, European regulators might.) Indeed, manufacturers make much of their money from the cartridges, not the printer itself, which is often sold cheaply. Economists explain this business model as a clever way for companies to “meter” their customers, charging them according to use. If they could not tie their customers to their cartridges, they would charge more for the printer itself, and the kind of person who now uses his printer rarely would not buy one at all.
Apple's business model, however, turns this on its head. Apple makes its money from sales of the iPod, not sales of music; the printer, not the cartridge; the razor, not the blade. As Bill Shope, an equity analyst at JPMorgan, puts it, the music store is a “loss leader” that serves only to boost sales of the iPod. It is as if record stores existed only to sell record players.
Beware geeks bearing gifts
How vital is this loss leader? Mr Shope points out that iPod sales took off after the store was launched in April 2003. That said, only a small fraction of the stuff on a typical iPod comes from Apple's store. Most of it is still copied from CDs and some is acquired through file-swapping technologies such as BitTorrent. People do not become iPod customers to take advantage of the iTunes music store. But, argues Mr Shope, the store may be an important reason why they stay customers.
Because the music store is only compatible with the iPod, a customer who wants to abandon Apple's player in favour of something else must replace all the music he downloaded from the store. It is as though a person's entire record collection worked on only one brand of gramophone. Hence with each song a customer buys, he binds himself a little more tightly to the iPod. Apple offers its customers a “Trojan horse”, according to Mr Shope. Customers embrace its iconic device, and then, like the hapless Trojans, find they have fallen into the hands of the gift-givers.
Are consumers so easily duped? The so-called Chicago School of antitrust economists, represented most prominently by Robert Bork, once a nominee to America's Supreme Court, and Richard Posner, another judge, assumes consumers are rather smarter than the Trojans were. Customers must know that any music they buy from Apple will work only on the iPod—it is not a secret. If they nonetheless choose to buy it, they must think the benefits the music store offers outweigh the switching costs it imposes. No doubt Apple's music store would be more attractive still if it were opened up to any player. But if Apple chooses not to do this, that is its business.
Some economists think that this view is too sanguine. They argue that the appeal, or otherwise, of tying yourself to a company depends on what other customers do. If everyone else gives up the ability to shop around, then no rival company can enter the market, because most of its potential customers are already wedded to the incumbent. And if no alternative can enter the market, then the freedom to shop around is not worth very much. One need not worry about switching costs if there will never be anything to switch to. Applied to Apple, this argument goes something like this: every time someone buys a song on iTunes, he becomes a little less likely ever to abandon the iPod and makes the potential market for iPod's rivals a little smaller.
Mr Shope thinks iPod customers, having spent money on their iTunes collections, will prove quite “sticky”. But Apple cannot rest too easily. The market is young and customers' commitment may not yet be deep. Just as CDs prompted record-lovers to abandon their vast collections of vinyl, a rival to the iPod, were it good enough, could tempt audiophiles to abandon their iTunes collections—with or without help from France.
