[molotovh]

Since we're discussing pedantic grammar rules here anyway (sorry): the problem here is not that the rule is inconsistent, but rather that you are applying the wrong rule.

"Its" is not merely a modification of the possessive noun like "Dave's". "Its" is a possessive pronoun like "his" or "her", a separate (but related) class of word. We don't write "he's car" or "she's car", so we also don't write "it's car".

But that said, this is one is tricky specifically because the accepted possessive pronoun so closely resembles a modified possessive noun. I agree that your logic at least makes sense and I think that makes "its/it's" the least offensive of the common grammar mistakes. I don't see it as nearly the same degree of mistake as "your/you're" "two/to/too" or "there/their/they're".

For example, if you were discussing the soundtrack of a movie about a killer clown demon, it would be entirely appropriate to say "It's soundtrack is well-produced." :-)