The Economist discusses the economics of the iTunes-iPod tie in relation to the French interoperability law, which apparently was passed a couple of weeks ago. They make the familiar razors-and-blades analogy that has been discussed here on TLF before. The weird thing is, they never get around the actually making an economic argument about why the tie is economically beneficial:
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.
The article goes on to explain why this arrangement benefits Apple, but it never gets around to explaining why it’s good policy to allow Apple to tie the iPod to iTunes. I understand the argument when you’re selling cheap printers and expensive ink cartridges. That allows manufacturers to capture more of the value of the printer (by charging heavy users more) to cover development costs while simultaneously making the printer more affordable for light users, who otherwise might not be able to afford one at all.
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