Even if Apple fans believe that Wal-Mart's (NYSE: WMT ) launch last month is inconsequential, they have to worry about Amazon. Just step into Amazon's virtual storefront, and you'll see that the intuitive interface knows you better than you know yourself. It will recommend items based on past purchases, or what others like you are buying now.
And iTunes doesn't do this? My Mac was pitching me more ear candy from The Police as I was listening to Sting's "Shape of My Heart" yesterday evening. Apple knows what I like, Rick. Maybe not as well as Amazon, but well enough.
Yet I digress. What matters is this. Go ahead and click; I'll wait. (Taps feet.)
Anatomy of a best seller
See what I mean? Nine of the 10 best-selling MP3 players at Amazon are iPods. That's why you're not seeing Jeff Bezos chatting up alternatives from SanDisk (Nasdaq: SNDK ) or nearby Microsoft (Nasdaq: MSFT ) .
When that changes -- and it could -- that's when you worry, Apple investors. Not when Amazon starts selling tracks for $0.89. Chances are those tracks will be downloaded into one of the 110 million or so iPods out there today.
Bezos knows that; he's no moron. And he knows that Apple doesn't need him for distribution. Would CEO Steve Jobs pull the iPod from Amazon's digital shelves? Probably not, but it's enough to know that he could.
Anatomy of a competitive advantage
Which brings me back to the big question I asked at the open: How is this bad for Apple? Rick says it's a question of choice. With more options for how to store and play music, consumers will flock to the cheapest MP3 player they can find, he concludes.
No doubt that's logical. Spock would be proud. But isn't there more at work here? Shouldn't we dig deeper? I think so. Let's pull apart all four of Apple's primary advantages when it comes to the iPod.
- iTunes. Before it was a store, it was utility software. Well, folks, it still is. Its purpose is to sell iPods by making it easy to manage the cuddly device. Collecting even one penny of revenue from the iTunes Store is a bonus, pure and simple.
- Design. Yeah, I know. How do you quantify great design? You can't. But we all know it when we see it, and we all know that the iPod is more hip than its peers. We also know that Apple is one of the greats when it comes to product design. That's why it routinely collects honors in this category from business magazines.
- Distribution. Is there a better sales tool than Apple's carefully crafted retail stores? Not according to the data. The Mac's daddy outdoes Tiffany (NYSE: TIF ) by a wide margin in sales per square foot.
- Margins. The lonely kid. The one we never talk about but who quietly waits for his chance to come off the bench and belt a pinch-hit home run. Apple's margins on its iPod models routinely hover near 50%.
Now, does Amazon's new store seriously undercut any of these advantages? iTunes, maybe, but that's it, which isn't saying much. Design and distribution do far more to fuel demand. Margins, meanwhile, protect the iPod franchise in the event of a price war.
Amazon 2, Apple ... Oh, don't ask
Finally, let's talk numbers. More than 3 billion songs have been sold via the iTunes store. Assuming Apple retains no more than $0.05 to $0.10 per song, that's roughly $150 million to $300 million in revenue over four-and-a-half years of sales.
By contrast, the iEmpire collected more than $22.6 billion in revenue over the trailing 12 months alone. Tell me again how worried we should be, Rick?
Never mind. We know the answer, and it's not much. So let's take Amazon's $0.89-a-song-strategery for what it is: great for consumers. And anything but bad for Apple.