iTunes is the Key

Apple isn't going to come to rule the world through the iPod or the Mac mini and they're fine with that. I think that the iPod is simply a device to drive activity to the iTunes music store, as far as Apple is concerned, despite the fact that it currently offers a higher profit margin for Apple. Similarly, the mini is intended to drive user interest and participation in the offerings of iTunes, particularly how the Mac platform can enhance the iTunes experience.

Why do I think this? After all, the numbers would seem to point out that the iPod is making Apple more money than song sales. Apple has sold, to date, 60 million iPods. Take this Forbes article for a dose of reality. Margins on the iPod, while good, are lower than in their other product lines. Apple is making, on average somewhere around $35 per iPod if the sales of all models are averaged together.

$35 profit on 60 million units is pretty good. That's over $2 billion that can be attributed straight to the iPod. So why do I assert that iTunes is ultimately more important, and the real wedge for Apple dominence? Simple - just as you buy a car once in a great while, but fill it with gas quite often, Apple will be rolling in long term dough thanks to iTunes.

Apple has sold over 1.5 billion songs through its store. This, despite easy access to free (albeit illegal) media on the Internet. Apple is now the #5 music retailer in the entire United States and it's gotten there in less than five years. Apple predicts it will be the #4 retailer by the holiday season.

Various analysts have been quoted as saying that Apple makes $0.04 per song downloaded, which would result in an astoundingly low $60 million in profit from the running of the iTunes store. That's 33 times less profit than the iPod. But here's the thing - iTunes is going to keep on accelerating in its' growth, even while iPod sales slow down. Apple has added TV shows to iTunes and just added movies as well. The more that iTunes comes to dominate the music retail space, the better deals they will be able to cut with music distributors, leading to higher margins. Owners of iPods who feel no need to buy the latest model will still be returning to the store to get new tunes, TV shows and movies.

And with more content to sell every day - new studios and distributors - iTunes is becoming something far more than a simple retailer. It's becoming a distribution channel and that puts it in competition with the likes of the cable companies. Unlike cable companies, iTunes is providing a significantly greater amount of consumer choice and that should help to endear, and even further accelerate, Apple's rise through iTunes.