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iTunes is a loss-leader that it gets people to buy more iPods, which is a high-margin product. Given that the iPod has roughly 30% of the mp3 player market, I'd say it is working.

That might not be as smart an idea as it seems. When I got my freebie iTunes from the Pepsi promotion (my family drinks a LOT of Diet Pepsi) I immediately ran Total Recorder while playing the songs on the iTunes application. I could save them as MP3's, and transfer them all over the house on my wireless network. I never bought, and never will buy an iPod, and there are millions like me.

As soon as others figure this out, iTunes becomes a loss, not a loss leader. Online music sales have to make sense from a profit standpoint if that delivery method is to become viable. I just don't see it happening with technology always one step (or more) ahead.