A few days ago I asked my students the following question:
It's well-known that internet piracy of music is rampant. How is it, then, that iTunes can make a profit selling songs at 99 cents each? Someone who can use iTunes presumably has access to the rest of the internet. Apple is competing with other producers of an identical product who offer it at a price of zero.
One young lady made a very insightful comment - she pointed out that Apple is not so much selling the music so much as charging a transaction fee for the use of a convenient, reliable and safe search engine. The content may as well be free; it's the search that is being sold.
Finding a song on pirate sites can be difficult, due to spotty labeling, broken torrents, virus-infested files and so on. iTunes users don't have to put up with any of that.
The flat 99 cents that are charged for each song tend to bear out the 'transaction fee' idea. Neither popularity, nor file size, nor the original source of the content affect the charge.
This is the same model that some academic journals use for people seeking PDF files of their articles. The journals also compete with 'free' producers: most academics have free access to these articles at work. There's a big difference in this market, though: buying the reprints from individual journals is a painful process, requiring separate registrations and payment schemes for each publisher. Accessing the articles via a work-place portal is not only 'free' (in the sense that the employer bears the entire cost, usually fixed) but vastly superior in efficiency. Library web sites and databases such as EconLit look through the contents of dozens of publishers for each search.
The biggest search engine of all is Google. Search is free, and content found through the search is usually free. This engine is supported through ad revenue, which I find curious. Though I use it many times a day, I can't remember the last time I clicked on one of the sponsoring ads, even by accident. I don't think I'm alone in this.
It's not unheard-of in the offline world for human tour guides to share their take with those providing the sights of note - iTunes's model. The journal publishers are individual stalls in a bazaar, competing with a supermarket. Google hopes that passengers on the trip will buy from the in-flight boutique, or at least burn into their memory the sponsored posters on the walls.