My colleague Tyler Cowen over at Marginal Revolution wonders  whether iPod is going to make it. He wonders if Apple has much of a competitive advantage in the hardware suggesting that the songs are basically a loss leader  to get people to buy the device. Then when competition in devices heats up, Apple will be cooked. Tyler asks:
Above and beyond the ephemeral value of superior style, what is the source of Apple’s long-term competitive advantage?
I’m a little more optimistic. The iPod is more than just beautiful. It’s ergonomically delightful and remains ahead of the competition while it continues to improve battery life, ease of use and soon, storage space. The Apple desktop interface, iTunes, also continues to improve. It’s incredibly pleasant to use. My audiophile friends tell me that the Apple music compression system, AAC, is considered the best.
Right now I use my iPod in the car to listen to books through my car stereo I’ve purchased at audible.com. (I use the Monster iCarplay device that charges and acts as an FM transmitter at the same time. Works beautifully.) I’m sure it’s possible to do that with other MP3 players but this sure is easy.
For me the real question is how Sony and the other studios will survive. What is their competitive advantage? Their distribution system and their taste. The former is very expensive with not that much return for the consumer. It’s the reason Apple charges 99 cents rather than what, 49? Or 19? Or 9? Built into the costs of downloading are the old deals the labels have with their artists that were built to cover brick and mortar and human distribution chains. I’d much rather buy my music off the web. For me, a non-audiophile, the quality is fine. The distribution costs add nothing to my enjoyment but I’m paying for them anyway.
The real challenge with buying music on the web is filtering the quality. I don’t want to wade through a zillion newcomers to find the gem. That’s what I’m willing to pay a music studio for. The solution is for iTunes to become a music studio, highlighting new artists and sellling their music to me at low cost. That cuts out the middleman distribution costs and the savings will be shared by Apple, the artists and me, the listener.
So the real question of what the music business will look like in five years is a question of how hard it will be to be an “editor” or filter identifying new talent that people will enjoy. Sony is pretty good at that now. But it might be easier to copy that skill than it is to copy the hardware and the software as Apple continues to improve.