Herb Greenberg's "Weekend Investor" column today in the Wall Street Journal drives home an important point: it's easy to miss the razor for the blade. I'm referring to the classic "razor/blade" business model, one which is often cited as being well-suited to open source.
In Apple's case, it is critical to figure out the "blade" because Apple's iPod sales seem to have finally hit the saturation point:
While last quarter's 21% increase [in iPod unit sales] was respectable, it is sharply lower than the 32% increase of a year earlier. Then, there is the iPod's revenue growth, which skidded to just 5% from 36% a year ago. That suggests not only aggressive price promotions by Apple (always a sign of sagging growth) but also a migration of consumers to the least expensive iPods.
Not good, right? Maybe, but it ignores the real question: is the iPod driving Mac sales (yes) and will it contribute to iTunes music sales (almost certainly). The iPod, in other words, is the razor, and it's leading to some mighty impressive blades.
It's also a nice reminder to the open source world that the razor/blade model (or, in economics terms, a model of "complements") need not involve giving away free software in order to charge for the "real value" (i.e., proprietary software).
In the case of Apple, it makes 30% profit margin on its pricey iPods (according to analyst Charles Wolf), and makes significant money on its Macs and iTunes sales, too. It's not a question of free versus paid, but rather buying one must-have product and discovering that its cool factor translates over into Mac hardware and its data-value translates over into iTunes sales (which have made Apple the third-largest retailer of music, offline or online).
What is your blade? Are you sure?