Amazon made big news lately when they launched a new digital music service to compete with iTunes. Some news reports suggested that Amazon would pose a threat to iTunes' dominance. Perhaps that may prove to be true, but there is one important way in which Amazon may actually HELP Apple. How is that?
iTunes songs and iPods are complementary goods. If consumption of digital music rises, it will fuel more demand for digital music players - and iPod is the dominant player in that market. Where does Apple make their money? They appear to make far more profit from selling iPods than from selling songs on the iTunes stores.
Think of it the way that Harvard Professor David Yoffie explains it in his classic case study about Apple. Yoffie draws on several sources that describe the Apple business model as razors-and-blades in reverse. He quotes Steve Jobs stating that Apple makes very little profit on a song sold through iTunes. Yet, the profit margins on iPods are very healthy. They essentially provide the blades (songs) at a low price as a means of driving demand for the razors (the very profitable iPods).
If this is indeed the business model, then Amazon's latest move in digital music may actually HELP Apple... by fueling further demand for iPods, iPhones, and iPod accessories.