When the electronic doors to the iTunes Music Store first opened, Steve Jobs made sure to point out that Apple wasn't making a penny off of this new service. Instead, he explained that the store's revenue was used to cover the costs to develop the software and host the service, while any leftovers went to the copywright holders.
So, why bother to create the service if you're not making any dough? Simple, the store acted as a loss leader to sell more iPods (which orginally had a higher profit margin). More iPods, not more iTunes, would create cash for Apple.
But here's the thing, the argument is bogus on multiple fronts. First, iTunes never really acted as a loss leader...People weren't convinced to buy an iPod after seeing iTMS...heck, most iPod buyers didn't even visit iTMS until after they had bought an iPod. Second, I never believed that Apple wasn't making any money with iTMS. After reading about one dollar songs in Wired it was clear that there had to be enough inefficiency in the music biz to still make a profit selling songs for a buck.
"Operators of downloading services need to set prices by keeping in mind that it is substantially cheaper to deliver an electronic file than a packaged CD or single."
"The appropriate price of a downloaded song is 18 cents. At that price, he said, the songwriter and publisher could receive eight cents per song, the inflation-adjusted sum they are entitled to under the Copyright Act of 1976. The performer and label would get another eight cents, leaving a couple of pennies for the distributor."
Earlier today, I came across a story that seemed to validate these beliefs. Robert X. Cringely writes that "in the long run, iTunes is were the money is". He mentions that in the near future, Apple may look to license iPod clones. (comments in italics added by me)
"But Steve Jobs HATES clones, doesn't he? He killed the Mac clones back in the late 90s.
What Steve hates is hardware competition, but iPod clones will only happen at a point when Apple has decided to get out of the business of making its own iPods (I don't think they ever will completely exit this business, there will always be a premium Apple iPod to choose.) Think about it. If Apple licensed iPod technology, the company would receive from its OEMs a per-CPU license fee of anywhere from $5 to $25...As Apple's profit drops on each iPod, eventually the per-CPU figure will approach what Apple might receive from licensees. At that moment it makes more sense for Apple to license clones than it does to make more iPods. Licensing clones AT THE RIGHT TIME would lead to huge clone sales, effectively killing any significant iTunes competitor. And in the long run, iTunes is where the money is."
So there you have it, insert your own Star Wars flavored tagline about Apple getting back into the clone biz.
Why iTMS is just a facelift for a corrupt industry.