The Economics of France's attempt to open up iTunes
By Paul
The Economist’s Economic Focus column looks at French attempt to allow customers to play music bought from iTunes on one of the iPod's rivals;
“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.”
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