The iPod: RAZRs and Blades 2.0 and 3.0
Lots of related news stories this week; such is the nature of business coevolution.
Take this group of stories. Monday the Wall Street Journal had a front-page story (paywall I assume) on podcasts, not by the blog forward wave but instead by ABC News and Clear Channel. The same day, the New York Times ran a story on efforts by the Japanese music industry to impose a content tax on iPod sales in Japan. This would be a royalty tax, and the revenues would be distributed among the participants in the music industry.
On Wednesday, Apple introduced a new iPod for video (stories here and here). That same day, Apple reported that its quarterly profit had quadrupled. And on Thursday, the Wall Street Journal ran two stories (here and here) about how Comcast was altering its strategy, including teaming up with Google to buy a piece of AOL.
What is going on? The answer is the ever-changing role of RAZRs and Blades. Well, not really RAZRs and Blades but razors and blades.
I am not interested in the hot Motorola RAZR cellphone—I can’t get excited about cellphones—and I am not talking about blade servers (no one save for network administrators gets excited by those).
I am instead talking about razors and blades. Gillette used to give away razors to sell blades. H&P and Dell and others basically give away printers to sell toner cartridges. This is a common business strategy, and can give rise to a variety of contract, antitrust and copyright issues (see the recent 9th Circuit Lexmark case, and if you are really a glutton for punishment, my recently published paper). (The paper is a chapter in a new book on U.S. and EU perspectives on antitrust, patent and copyright; I haven’t seen the book yet, but it should be good.)
With the iPod and iTunes, Apple seems to have inverted the strategy, giving us Razors and Blades 2.0. Apple is making a bunch of money off of the iPod; I am not sure if Apple is making real money off of iTunes, but given that Apple isn’t really in the music business, it wouldn’t be at all surprising if Apple is working hard to keep iTunes prices low, all the better to drive sales of the iPod.
Give away the blades and sell the razor. Apple’s contracts at iTunes will expire and content creators are pushing to raise prices. The content guys aren’t making money on iPod sales—absent the content tax of the sort being pushed in Japan—and are willing to sacrifice iPod sales by raising iTunes prices.
But that takes us to R&B 3.0 (no B.B. King here, we are still doing business strategy) and the introduction of the video iPod. The full-page ads in today’s newspapers for the new iPod show six uses, including one for playing TV shows. You can now go to iTunes and buy current ABC television shows—including Lost and Desperate Housewives—for $1.99 the day after the show has broadcast.
This is what the TV guys are calling cable bypass. Cable jumped in as an intermediary between broadcast TV and their customers, and broadcasters have struggled with that ever since. The 1992 cable act made an important change in the rights that broadcasters have to control their TV signals in creating retransmission consent rights. Those rights have changed the shape of what we see on cable by bringing more channels affiliated with networks to the cable wires (you want Fox, says Fox, you have to take FX).
But retransmission consent hasn’t created cash payments by the cable operators to the networks, the desired second-stream of cash from the content (advertising being the first and dominant stream). Putting TV shows on DVD has started to monetize the TV shows, and online distribution on iTunes is a natural next step.
The point to note is that while the music industry has moved online kicking and screaming, and we still have the conflict between Apple and the music industry given how R&B 2.0 has operated. We seem to have much less of a conflict for video and R&B 3.0: Apple will want to sell video iPods, and broadcast TV may be happy to jump in and help, especially if they can push cable to the side in doing that.