iTunes: I hate it when I'm wrong

Well, I have to admit it.  I was wrong, so wrong.  As the father of five, and someone married to the same Eileen Marie Harvey for 25 and 1/2 years, you would think I would be used to being wrong.  And yes, I don't get that, Lord of the Manor feeling when I arrive home, but I'm usually pretty right in my professional predictions. But, I wrote an article this past summer for Fast Company magazine in which I said that the iPod was doomed because it was not part of an open ecosystem of innovation.  The closed architecture of the iPod, I reasoned, was going to mean that the cluster of potential innovations was going to surpass it. Well, I missed the point that the real innovation ecosystem is a two sided information market, in which Apple allows for creation of a highly subsidized market for music, podcasts, and new forms while they extract value from their beautiful devices, from the Shuffle to the iPods. 

As others have pointed out, the key to robust information markets is to subsidize one "side" of the market to generate value for another "side" and then have a strong business model which can extract value clearly from one side.  By creating a player that allows the playing of illegal music easily, along side legal music, Apple made the music on their devices "subsidized," and got the combined traffic of those who wanted stuff for free, and those willing to play.  I would bet, for example, the majority of music on most iPods is illegal, but some of it is paid for, and that is good news to the music industry for they are getting value.  When there is a rampant illegal market, it is in the best interests of the "property owners" to somehow integrate the traffic of the illegal market with the legal, for over time you can begin to extract value and cooption is cheaper, and more effective than prosecution. 

Apple does not make much, if any, money on the early downloads at 99 cents a piece, the real margins are in the players; again, subsidy, of the legal stuff.  Now, over time, they may be able to have higher margins, and I don't know what they make on the new TV video offers, but the market was established with subsidy on the content side. 

Add to this the fact that they have the only designers in the space that actually design anything, as opposed to simply putting function in a device, and letting the user figure it out, and you have the industry dominant player that has a vast market share and traffic. 

Other two sided markets that dominate include: Window's willingness to subsidize developers and charge end users; Thomas Dolby did not charge component manufacturers, nor end users for using Dolby Sound.  He charged the electronics manufacturers.  Google gives us all lots of functionality and charges advertisers who want to get to us: again a two sided market.

So, I hate to be wrong, but I love the two sided market thing.  In the information world, there are just so many that win, and so many to be born.

Science and Ideology (Not scientology!)

Google: The best damn demand chain management company