In the last analyst's conference call, Peter Oppenheimer said that
iPod touch sales were up over 130% year-on-year (YOY). This in a
quarter when YOY iPod unit sales were down for the first time.
iPod revenue has been trending down for over a year, but this is
about to change.
Why did Oppenheimer talk down the iPod numbers? The FY 3Q numbers
were so good that he could deal with the drop in the
classic/nano/shuffle numbers and avoid headlines like "Apple in denial
over iPod numbers". Another company would have emphasised more the
internal research showing that 50% of iPods are being bought by new
users, would have suggested the recession was to blame, and would have
pointed to
the Zune's catastrophic sales (down over 50% YOY).
Talking about managing
the decline of a major business is also much easier when it has
been replaced in the analysts' eyes by something much more profitable -
the iPhone.
Migrating the iPod User Base
Talking down the numbers also set the stage for the cannibalisation
of the iPod user base. For Apple, the day of the classic and the nano
is largely over. In the same way that the nano replaced the much loved
mini when it was still selling well, it is time for the iPod touch and
iPhone to take over.
More than 100 million iPods have been sold over the last two years,
but the future is in mobile computing, not in playback devices for
music and video. Apple needs iPod buyers to move to the new platform,
and the more that move, the more developers will cluster around the
iPhone and iPod touch. As another Steve, Mr. Ballmer, said "Developers,
Developers, Developers." A strong user base and rising sales with free
development tools will keep them happy as Apple works through hiccups
with the App Store.
The iPod classic is obviously on its last legs. The last major
reason for buying it is capacity. As Apple has not taken advantage of
newer 256 GB hard drives in a redesign, the classic is effectively at
the end of its life. All Apple needs to do is offer a 128 GB iPod
touch. It will be more expensive, but it will allow Apple and the
retailers to sell off their stocks of classics without heavy
discounting. Even if this high capacity iPod touch is $499, it will
sell: four times 32 GB for less than twice the price. The only reason
for not launching it in September and offering a 64 GB model instead
would be if flash memory is too expensive.
The nano currently occupies the $199/$149 price points that the
bottom of range iPod touches need to take over. Last year nano memory
doubled for the same money, and a new range of colors came out. If
Apple is still following the car manufacturers marketing plan, this
means it is time for a new model design. Cost and manufacturing
capacity of the capacitive screens used in the iPod touch and iPhone
may mean that $149 is unreachable this time around, leaving a place for
the 8 GB nano and a cheaper 4 GB version to better fill the
gap between the $79 shuffle and the lowest price iPod touch.
Apple Needs a 'Cheap' iPod touch
A cheap iPod touch is needed for the games market. At $169, the iPod
touch would cost the same as Nintendo's DSi and Sony's PSP 3000, so
when parents look at handhelds, they don't think of the iPod touch as
"expensive and fragile" but as "costs the same and with much cheaper
games and more of them". Many will be willing to pay the extra for more
memory and upgrade to the $199 model. This low cost model will do much
to kill the PSP market in North America and Europe, adding 5+ million
iPod touch sales a year.
The DSi will also look expensive, but with over 100 million sold,
there is a strong DS replacement market. Sales of over 6 million since
the November launch in Japan should have paid for the R&D, so
Nintendo could cut the price and start bundling a game or two to add
value.
There have been many rumors about Apple adding a 3.2 megapixel
camera to the touch as they already have to the iPhone. This makes a
lot of sense in higher end 16, 32, 64, or 128 GB models. Then iPod
touch owners won't need a camera in their cellphone, and they can buy
cheaper models. This effectively moves value from other cellphone
makers and further cuts their already thin margins. Adding a camera
will also drive down unit costs. Apple will be able to buy 40+ million
cameras a year, and by using its cash pile, put in place long term
contracts similar to those in the flash memory market. The more Apple
buys, the more it drives the pricing, and the more it forces
competitors to react instead of setting the prices and defining the
market.
iPod touch vs. Zune
A look at Microsoft's Zune HD shows some of the issues. People buy
ecosystems. As people migrated from the Walkman era, a digital music
player was enough. For some, that is still enough, but the value has
dropped from hundreds of dollars for a 5 GB player to less than a
hundred.
Better video for films, TV, and YouTube was the way to add value two
years ago. Now it's games and apps, and most buyers who only really
want to listen to music would like an app or two. The Zune HD would
have been competitive two years ago, but the App Store changed the
market.
An 8 GB iPod touch at $199 will undercut the lowest price Zune
HD ($220) and have enough memory for many music collections and apps.
The best Microsoft can hope for, even though Apple will charge higher
prices for its 16 and 32 GB models, is that Zune users will buy the HD.
I can predict with near certainty that sales of the HD will be
disappointing and add to the Zune losses.
Impact on Apple
How will these changes to the iPod touch affect Apple's figures? I
expect sales of 10 million
iPhones and iPod touches this quarter without taking into account
any new models. Apple sold over 50 million iPods last year. With these
changes, the touch will be the only high-end iPod and thus the only
compelling upgrade for iPod owners - and it will be competitive with the
PSP and DSi, so at least 25 million sales looks reasonable. Upgrade
sales will increase the iPod average selling price (last quarter $146)
and, combined with new sales into the handheld games market, revenue
could easily be up a billion dollars.
The main gain, however, will be in doubling the number of users of
the iPhone/iPod touch platform to over 100 million when the 2010 iPhone
sales are added in. Then OS X will be seen as the major
mobile platform. This will drive more developers to work on OS X,
which will increase App Store revenue. By the end of the year, the App
Store should be nicely profitable and a new billion dollar business for
Apple.
If Apple decides to add an ARM-based netbook or an iPhone HD or enter new iPod markets
like hearing aids or to
change the face of
digital music the gains will be even larger.
We will see during the annual iPod refresh in September how much of
this will start happening in time for Christmas. Before then, the
iPhone shortages need to be sorted out, as recently the carriers in
Australia, Ireland, and Canada have reported being out while AT&T
quotes a 14 day delivery period. The launch in China may be delayed for
the same reason, and selling a more profitable iPhone will always take
priority.
If it isn't the year of the iPod touch, 2010 will be the year of the
iPhone. 
