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Dethroning King Gillette: Is iPod the Razor or the Blade?

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

More than a century ago, King Gillette invented both the safety razor and a new way of marketing consumer goods. Before Gillette, men shaved with straight razors, which required skill to both make and use, and lasted almost forever. Gillette's safety razor was mass-produced and required little skill to make OR use, but couldn't be re-sharpened, so the removable blades had to be discarded when they became dull. His marketing breakthrough was selling the razor handles at little or no profit while making huge profits on the consumable -- the blades. This same technique is used today to promote mobile phones and inkjet printers. And it is supposedly behind Apple's success with the iPod music player.

But in the case of Apple, is the iPod a razor or a blade? In other words, is Apple a hardware company or a media company?

I think they are a hardware company, but one very well-informed reader with whom I've been discussing this disagrees.

To me, it seems that Apple has reversed the relationship of razors and blades, and eliminated the loss leader role entirely. Apple makes very little money from selling songs, but it does make some profit. Apple makes a LOT of profit from selling iPods. So the song is the razor, not the iPod, and that's because the price sensitivity is currently about the content, not the player.

Apple's margins on the iPod Mini are about 30 percent from the retail channel and 60 percent through its own stores, so let's say that's an average of 35 percent or $75 on an iPod Mini. Apple makes about $0.20 on each song. So to make more money from the songs than from the iPods they'd have to sell 375+ songs per iPod. Apple has sold 250 million songs to date and has sold 10 million iPods. That is 25 songs per iPod, not 375+.

How long does a digital song last? If the customer is careful, it should last effectively forever. How long will an iPod last? The life expectancy of a mobile phone is 18 months and the life expectancy of a PC is 3-5 years. I'm guessing the life expectancy of an iPod will be something in-between, on the order of three years. That means Apple can expect to make the profit equivalent of 375 songs every three years from selling a new iPod to each old customer.

So Apple isn't in the content business, they are in the hardware business, and will be for sometime to come.

But my friendly reader sees it differently.

"I see your point on the iPod being the razor, but we thought of it more as the blade since it is essentially the disposable item. You will constantly be upgrading your iPod, much like you buy improved razors and as you point out, the music file should last indefinitely..."

"As for Apple being in the content business, let me offer a comparison. In the 1970s, Motorola used to tell people it sold technology. You talked to any of the SPS engineers, production control managers, marketing people, etc., at their facilities and operations in Phoenix, and they would say that 'we make and sell technology.' But between 1978 and 1982 they stopped saying that. They began to say 'we provide the technology.' That subtle shift in language reflected a change order of magnitude. Technology migrated from being a product to being the process (an enabler) by which things happened.... It seems to me that Apple is now making that shift. They appear to recognize that digital or electronic technology is no longer a product but a process, an enabler of activities rather than the activity itself. When I bought my first computer, I was buying a computer. Sure I wanted to write programs to do things, and use software that did things, but fundamentally I was buying a product that was about the product."

"I recently purchased a Sony Vaio with a tuner built into it. I wasn't buying a computer, I was buying an entertainment appliance for the kitchen. I wanted an appliance that I could use to watch TV, play games, surf the net, have the kids do homework on and be in a common area. That's why I think you are right about the Mini. I suspect Apple will add whatever connectivity they need for I/O, be it opto audio or wi-fi audio. But that box is an appliance, not a computer. Or at least it has the true potential to be. And in the digital world, that puts them into the content business, because digital appliances are about content just as kitchen appliances are about food.... And it comes in white."

We've agreed to disagree on this point, but Steve Jobs and Apple have definitely hit a sweet spot in the music market, doing what King Gillette could never dream to -- make money on all parts of the deal. And since my reader brought up the new Mac Mini that I wrote about in detail last week, let's further consider that machine in this same light.

I wrote that the Mac Mini is destined to be a high definition movie machine, but the fact is that it will find many uses. Wil Shipley of Delicious Monster Software (www.delicious-monster.com) sees it as his ideal server.

"I bought two Mac minis this week -- both will be servers. One is going to run my company's store. Our new product is a runaway success -- we've sold $350,000 worth of software in the first two months. I say this not to brag, but to make a point. The store is running on an old G4 cube. The cube isn't under any kind of load at all. It processes one sale every five minutes or so. There's absolutely no need for more store sites to run on a G5. If you're processing a transaction every second, sure, get a G5. But if you are, chances are good you're a multi-multi-million dollar business, and you don't care what an Xserve costs."

"The second box is going to be our source-code server. It's safe as heck, because OS X includes one-click firewalls. And, again, it's not like I have so many engineers that we're checking in code every second. If it processes a transaction every ten minutes, I'll consider our company very productive. For us little guys, the Mac mini is the absolute perfect server. I'm hooking up two identical external drives to each Mac mini (total of four), each two set up as a RAID 1. (Each drive is slightly bigger than the mini.) The chances of losing data via disk failure are astronomically low this way. And if a motherboard crashes, I can swap in the other box -- I have a $500 hot-backup OF THE WHOLE MACHINE. I have a complete server 'closet' that fits in less than a cubic foot. It's quiet. It's got a redundant RAID built-in. It's easy to administer and set up. I share a monitor and keyboard with my main workstation, so I don't have any extra clutter. Look out, Linux."

Imagine a Mac Minicluster running Apple's xGrid software. Start with a 16-port fast Ethernet switch and stack 16 Mac Minis on top. That's a 720 gigaflop micro-supercomputer that costs less than $9,000, can fit on a bookshelf, and can be up and running in as little time as it takes to connect the network cables. High schools will be sequencing genes.

Back to my HD video scenario, the three attributes of the Mac Mini that seem to be missing for this application are optical audio, raw processing power, and storage. The lack of an optical audio connector stumps me. Apple already uses a combined minijack/optical jack on the Airport Express and the iMac, so why not in the Mac Mini? Sticking by my HD scenario, I can only speculate that it has to do with Sony. A couple years ago, I spoke at a Sony Consumer Electronics sales conference, and was told that all high-end Sony TVs would eventually get iLink (FireWire) ports. Could that be the reason?

The processing power is there, if just barely. Apple's web site coyly says that a dual G5 is "more than enough" to decode a 1920-by-1080 HD video stream. How much more than enough is anyone's guess. But I think this is Apple trying to obscure the truth. The HD video stream they described is 1080i and runs at 30 frames per second (fps). But movies don't run at 30 fps, they run at 24 fps. And there is a second HD video standard, called 720p, that uses a 1280-by-720 screen. Comparing 1080i-30 to 720p-24 we see that the former standard requires 7-8 megabits-per-second (mbps) to carry an H.264 video stream while the latter requires half that -- 3.5-4 mbps. So 720p-24 requires half the bandwidth AND (because of the lower resolution) half of the processing power, which means, according to Apple, that a single G5 would do. Yeah, but the Mac Mini uses a G4 processor, remember? But H.264 decoding performance is almost entirely dependent on the speed of the processor's Altivec unit, which benchmarks show to be comparable in both chips at similar clock speeds. So if a 1.25 GHz G5 has enough grunt to decode a 720p-24 stream, then so does a Mac Mini.

Isn't it interesting that Comcast, America's largest broadband ISP, is increasing its base bandwidth from three mbps to four mpbs just now? If I were running Comcast and wanted to drive a nail into DSL, I'd find a killer app that required all of that bandwidth, yet could also be fairly easily proxied to lower the backbone hit. I know, I know, Comcast is in the video-on-demand business already, but that isn't going to crush DSL, and this might.

So does this mean that Steve Jobs is about to replace Howard Stern as the King of all Media? One reader certainly thinks so:

"You do realize that the MiniMac is the Netflix killer, and the next wave of the "digital content" revolution? With the MiniMac, a decent set of HD movies as well as old content, an iFlix client connecting to legal content and BitTorrent to transmit, Apple has eliminated the most costly part of the NetFlix model while maintaining all of the good pieces. When you examine the NetFlix annual reports you can pull out the fact that one of their most expensive costs is the handling of physical media. The man power, physical shipping, and multiple location warehousing is much greater than the cost of getting the content.

"Apple can use their existing contract with Akamai to deliver graphics to instead act as a collection of Torrent Tracker nodes. All they need to do is to start to build the actual content and then wrap it in a reasonable DRM solution. Tie it to a program that keeps the list of movies that you want to watch in a download order, and then keeps the top 5-7 on your MiniMac. You sign a subscription with Apple to pay $20 a month to have 4 movies. Since the top 7-5 on your list are down, you could instantly check in one movie and check out the next one.

"Add old TV shows and you kill half of cable. Sign a deal with Discovery Networks and Turner Networks and get all of their content. Deliver it as part of the same subscription, but allow me to buy the shows at $0.99/each. I can take my 5 favorite M.A.S.H. shows and burn them to my own DVD instead of buying the entire season. Let's take my wife's favorite Alton Brown and Emeril cooking shows and burn them as well at $0.99/each. Bye, Bye Mediacom."

"Sign the deal with the owners of the movies to let my buy any of them for $10. I get PDFs for a disc label and a case to print on my ink-jet. Watch the movies, decide I like them, and do the impulse buy to get it and burn it. Provide empty cases for $0.50/each, and they're sent because I added that to the "cart" as part of the purchase. Scratch Best Buy."

"Suddenly there's a place where the small film producer can go to make some money back on an idea. Spend some time to use my own camera (perhaps that Sony HD camera) setting up a show. Build a trailer that I give away for free. Get some interest and find some backing because of it, and I can actually sign on with the new virtual studio that Apple has setup to release my movie. FanFilms start to produce the next wave of independent directors."

"Tie in the "Amazon" type product referral system. Find the people who run the left handed mandolin players website. Have them recommend movies to the twenty other people who are left handed mandolin players."

"I assume since I'm bright enough to figure this one out now, Steve Jobs could have figured it out a year ago without help from actually seeing the products and realizing what they are good for."

"This is the only piece of hardware that needs to be added to the mix of an HDTV and a broadband connection to completely blow away all rental, cable, and physical media business models, take all of them over, and replace them in a way that everyone can still get what they want. It doesn't need a tuner, because it could eventually replace the channels that right now I have to tune to."

"This isn't a computer. It's a revolution waiting to happen."

Maybe (this is Bob again). just maybe. Those last breathless paragraphs went a lot further than I am willing to go, but I know that the next year will show any number of interesting and very well-funded new Internet video ventures. Just look at the Blinkx, Google, and Yahoo video search engines for examples, and imagine what might be in the next version of each. Life is going to get harder for existing players in all those businesses and a lot more fun for the rest of us. And through it all Apple, is going to be selling lots of little boxes.

The Mac Mini, for example, is for sale right now at Target.com, which means Apple is going beyond its Mac resellers and pitching the whole iPod channel. That's enormous, because it removes for the most part that supply constraint that might have kept Apple from dominating the micro-server space described above. And Apple is going to be making video iPods, too. I guarantee it, simply because the iPod Photo has already been shown to handle 30 fps video -- Apple just doesn't like us to know that. The only difference between an iPod Photo and and iPod Movie is a slightly faster processor and a substantially larger screen -- yet another razor (or blade) for us to buy next Christmas.

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