Someone at Harvard Business School must be sick of writing cases about this. This being Apple’s proprietary strategy and whether the company should sell out for market share. 

Here’s the gist: Apple sacrificed its dominance of PCs in the 1980s when it refused to license its operating system to other PC makers. Wary of commoditization, Apple gunned for margins and gave up market share like it was Greg Norman at the 1996 Masters. 

So, fast-forward to now and, with Steve Jobs again on Apple’s throne, observers are wondering if Apple is about to make the same mistake. I took on this subject on my old blog last summer (first here, then here), looking at the issue in the context of iPod and iTunes. My conclusion remains that, until a real dogfight looms between either iTunes and competing services or between iPod and competing devices, there is no incentive to Apple to orphan either of them by opening formats. Given the kinds of operating profits – in margin % and real dollars – that the iPod contributes compared to what iTunes contributes, Apple would be insane to throw the iPod under the bus to make iTunes tracks playable on other devices. Likewise, given what sales of iPods can mean for sales of iTunes, why would Apple want people loading anyone else’s tunes on their devices?  

Now there is a possible storm on the horizon here, given the fundamental difference between Apple’s business model and that of its new partners in hardware and content. For the guys in bunny suits, it’s not hard to be magnanimous with your customers when you’re trying to stoke growth in a market, particularly a new one, such as digital music. Well, so far, so good. Apple sold 14 million iPods in Q4 ’05 (beating Wall Street expectations by 20%) and Jobs yesterday happily pointed to an ever-steepening sales growth curve for iPods. 

When we think about the consumer and the overall market, the picture isn’t quite as rosy. The average digital music device consumer likely sees his choice as pony up for the pricey iPod (or MacBook) or be cheap and risk owning the digital media equivalent of a Betamax player. As long as they’re doing the former in droves, growth is safe and Apple and its partners are happy. 

But, as many label execs have wondered aloud, how long can Apple shoulder the digital music market’s growth? If Apple is content to sacrifice over 90% of the computer market in order to maintain its margins, how long will it be a vigilant steward of growth for the digital music market? 

If you’re supplying silicon or content, your agenda is probably one of growing the whole market, not just Apple’s piece of it. Growing markets is messy. It involves sacrificing average selling prices (and margins, if necessary), managing commoditization and pushing for standardization, which means opening formats. Very little of which is on the agenda in the land of $2500 laptops. 

Of course, this could all be chicken little of me. As long as Apple’s competition remains fragmented and incoherent, iTunes and iPod will continue, for all intents and purposes, to be the digital music market.