For Google and Amazon, taking a bite out of Apple’s market share in music could be painful. According to the WSJ, Google and Amazon face big obstacles in taking on Apple, which already has a 90% market share in digital music.
According to the report, Apple’s approach is potentially cheaper for consumers, where as Google’s and Amazon’s approach could cost consumers more than they signed up for. The reason being, Apple is effectively making a bet on the falling cost of flash memory, while the Google and Amazon’s efforts expose consumers to the rising cost of internet bandwidth.
Google’s and Amazon’s services involve users streaming content from cloud-based servers to their devices. But with wireless operators introducing usage-based pricing for data, it could add up to big cellphone bills. For instance AT&T’s wireless service, charges $25 a month for two gigabytes of data and $10 for each additional gigabyte.
Apple’s strategy, on the other hand, rests on consumers storing their content locally on their devices. Its new iCloud service allows consumers to easily sync their music collections to any of their Apple devices. Aside from the initial sync, a Web connection isn’t necessary.
Apple’s strategy is also very lucrative for the company. According to the report:
Channels: Amazon, Apple, google, Pandora
Apple charges $100 more for an iPad or an iPhone with 32 gigabytes of storage than for one with 16 gigabytes. But that extra 16 GB of NAND flash likely costs Apple around $15. Gartner’s research director for NAND flash and solid state drives, Joe Unsworth, estimates Apple pays about 90 cents for a gigabyte of NAND.
Admittedly, a 64 GB iPad is only $100 more than a 32 GB device, suggesting a slightly lower NAND markup. Even so, Apple’s retail prices imply gross margins as high as 85% on NAND, compared with its overall gross margin of 41.4% in the March quarter. Moreover, NAND prices are likely to fall sharply, as new flash fabrication facilities come on line. Mr. Unsworth estimates the price of NAND fell about 18% in 2010 and predicts it will drop another 30% this year, 36% next year and 39% in 2013.
Bandwidth costs, however, are likely to go up, at least in wireless where capacity is scarce. And while consumers can use Wi-Fi networks to avoid cellular bandwidth charges, streaming via Wi-Fi may eventually come at a cost, too. Landline-based broadband operators will likely eventually introduce usage-based pricing.