What if someone makes a better-designed iTunes that happens to work using piracy instead of legitimate sales? Or comes close enough that $0.99 isn't worth it?
They've tried. For legitimate competitors, Apple has them outgunned in terms of selection due to all their deals with the labels and such. For illegitimate competitors, Apple has a comparatively huge budget for design/UX.
The "isn't worth it" actually goes the other way at this point: it's isn't worth pirating anything you can get from iTunes. Most of their customers are perfectly capable of pirating stuff, but it isn't worth their time compared to grabbing it from iTunes.
I'm not saying nobody will ever compete with them or that people don't still pirate anyhow, just that they're more than capable of competing with free. They've been successfully doing that the entire time, in fact.
I agree that's the status quo, but Apple's a rather unique organization in terms of their mix of negotiation ability, closeness to Hollywood, and design ability. And there's already cracks showing when it comes to their software quality. Those advantages can't last forever.
