The iPod business model
Based on a variety of posts I see around the web, the ipod business model must be widely misunderstood. I thought I'd clear that up.
- Apple makes the vast majority of their profits when they sell an iPod. With healthy profit margins and vast scale, they get the money upfront when a user purchases a device. Better yet, they give up relatively little to retailers, who usually take a large percentage, because they can confidently walk away and move product through the Apple stores instead of other retailers.
- Apple makes a nice chunk of change when they build and sell accessories. This has a higher profit margin than they ipods themselves, but the scale is much lower. On average, an ipod may sell for $200, and the average ipod attaches a tiny fraction of that in Apple-built accessories.
- Apple is building a nice profit stream from the licensing of accessories other people build (third party accessories). Again, the scale here is less than than on the ipod itself, but given that it's licensing the profit margin is nearly 100%. Apple enforces their licensing by requiring payment for third parties that want (a) the ipod logo (b) the ipod interface and (c) to be sold in the Apple stores.
Of course, every business has parts that don't make any profit. In Apple's case....
- Apple makes very little profit when they sell a song; probably just better than breakeven. Ditto with videos, and they probably lose money when they sell a disney movie.
- Of course, no money is made when you download iTunes. Actually, a bit may be lost since they must pay something for codecs they include, although this is probably trivial given that they "cap" out most of these fees.
Taken together, this model has been very successful, obviously. It's now bigger than the Mac business they relied on for profits in the past, and is growing much more rapidly.
10 Comments:
The point you bring up about the low margins for ipods at retailers is interesting. It appears that there may be an opportunity for Microsoft to woo retailers into partnerships by offering larger margins. Retailers like Bestbuy basically give Apple-related products a small section of their stores, whereas the Sandisks of the world may be on a small rack or spindle.
Microsoft may be able to get real estate in stores comparable to Apple if they sweeten the deal with great margins and cooperative marketing campaigns. Sony has done this with Blu-Ray. If you walk into a Best Buy, the employees will throw Blu-ray at you instead of HD-DVD because of Blu-ray's higher margins. It'll be interesting to walk into Walmart, Circuit City, and Best Buy, etc. when the Zune launches to see how everything is setup, especially the accessories.
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I agree with some of the points that Sportsunit brings up about woo-ing retailers with higher margins on the Zune, but one thing that Apple has down is their retail chains.
However, if the Zune can't hold it's own against the iPod and it's amazing marketing is having an extra shelf in a store going to matter? If your going to get an ipod your not going to be turned away from purchasing it if another player has a bit more shelf space.
Secondly, Apple's retail chains allow them to sell tons of iPods regardless of shelf space in Bestbuy. This brings up another point I think is important to the Zune's success...
How is Microsoft going to communicate the difference in their product to the public? Most of the readers of this blog know the difference, but I'm talking about mainstream society...
Apple already has the cool product, the public gets that, and their retail stores allow them to showcase their products and create an atmosphere that just screams "BUY ME".
I bought my most recent iPod at Bestbuy and their iPod section consisted of a scratched ipod chained to a kiosk that someone had set the password to, and a few ipods locked away in a case...if Microsoft's plan is to only sell the Zune through retail stores like Bestbuy I think they're going to have a serious problem.
I mean, while a few tv spots and a giveaway on Ellen is always nice, Zune is about taking music to the next level and creating a connecting with people over music...and I'm not sure people will really get this if
you guys do not showcase your product in a way that makes people want to buy it like Apple does in their stores.
-Charlie
Very insightful comments from you both; trust me we've thought this through very carefully but we're into some areas where there will be some nice surprises this holiday and we need to keep them under wraps for a while.
I have to agree, Apple has a strong stucture for business when it comes to their "Pod". Unfourtunately, their proprietary software and codec limitations make them one of the most hated brands among DAP enthusiates. Recently, however, they seem to be focused on sueing every item on earth with "Pod" in its name, While an effective court maneuver, once they start sueing girls for making tote bags for computers it gets alittle rediculous. Steve Jobs is, in many peoples opinion, a jerk. Unfourtunately, I believe this is how he has made such an impact on the DAP market. On the other side of the spectrum, Microsoft has had its fair share of controversy. I just hope you guys on the Zune get past the conventional codecs and etc. and decide to add some real support to your monster. If by any god's faith you push your machine to the disturbing storage capacities of the "pod" then I will personally kiss your feet.
I am not pleased that apple is the most capable of making a REAL "mass storage" device like the iPod video 60-80gb. If by the end of the year a 60-80gb Zune steps into the market, I will be its first customer. Don't worry sir your work is not in vain. I concider myself one of the most wanting of Apple's dethroning from the DAP market.
Although when looking at the fact that 98% of the world uses a Windows interface, I tend to smirk alittle. I am not a Windows fanboy in terms but rather an Apple hater. One of my few gripes is that Apple fanboys seem to be the most arrogant of all OS users. At least Linux users have an open mind... pardon my pun... Except for my old Apple Machintosh computer I have never liked electronics associated that red fruit we call an Apple...
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I think it's important that the "premium" guys and enthusiasts see the zune on the shelves of their favorite stores (i.e. tweeter).
OT
By the way David, I'd greatly appreciate linkage to Zune60.net.
oops, my comment got a double post. Sorry bout' that Zunester.
Dear David Caulton,
You wrote in an earlier post:
"The library is very fast. Even a very large, 25,000 file library is very zippy for scrolling, jumping around, filtering and searching."
Does this mean that Zune will have "Instant Search" like in the new iPod. Because that's the most important feature to me.
That is fascinating about the profit of an iPod player vs iTunes downloads.
Assuming that a similar model will be in place for Microsoft with Zune... it's exciting to think about "killer apps" that Microsoft could encourage to maximize sales of Zune players.
Given that, does Microsoft intend to release an SDK for Zune? e.g. so that game developers can start building for Zune?
There seems to be every reason to do so, and early... but I may be missing something in my understanding of the business model...
Harvey
http://www.zunerama.com
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