How Can Apple Keep the iPod Relevant?

by: Larry Dignan April 02, 2008 | about stocks: AAPL    

Larry Dignan

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For years, Apple’s (AAPL) story–and much of its stock run–has been about the iPod, its halo effect and the making of Steve Jobs’ company as a consumer icon. Funny how perception can change in just a few months.

Piper Jaffray analyst Gene Munster is out with the third installment of a series of research notes looking at Apple’s “3-cylinder engine.” On Wednesday, Munster examined the iPod business, which is now viewed a slow growth business for Apple.

Here’s what we’ve learned from Munster thus far this week:

  • He’s sticking to his prediction that Apple will ship 45 million iPhones in calendar 2009 in what could be a home run call or a huge miss;
  • The iPhone is out of stock in the 20 stores he has called. That market intelligence led to speculation that a 3G iPhone is coming sooner or later. On the other hand, Apple may be having supply issues. Munster reckons that there’s an 80 percent probability that the 3G iPhone is coming. In either case, the news raised a small ruckus, but the evidence seems pretty thin for a real shortage.
  • And the Mac is the “most powerful growth engine” for Apple–a conclusion that isn’t all that surprising to Apple watchers. Munster expects Macs to continue to gain market share, but is modeling flat market share in calendar year 2008.

Those takeaways get us to the iPod business, which clearly isn’t broken, but has been tossed into the corner by analysts obsessed with the latest shiny new object from Apple–the iPhone.

After perusing Munster’s note it’s clear that the analyst isn’t going to throw the iPod overboard, but he expects flat unit growth in 2008.

While we do not see the iPod business as a significant growth catalyst, we believe Apple remains positioned to slightly exceed Street estimates in CY08. Specifically, we believe the Street expects iPod unit growth to be about 53m in CY08, essentially flat y/y. We disagree. We believe Apple can maintain iPod unit growth and slightly exceed Street expectations for the full year. While we do not believe the iPod will return to a high growth business (20%+), we do believe it will remain a growing segment (~10%).

In other words, the iPod market is nearing the saturation point. That said, Munster holds out hope that Apple’s SDK in June will create a bevy of cool applications for the iPod touch. By September, Munster reckons that there will be WiFi-enabled iPod touch that will run you less than $200.

Munster’s main theme:

In fact, we believe the concept of the iPod will change in the next 12-18 months from a standalone music player to a mobile Internet device that fits in your pocket. We continue to believe there will be standalone music players in the iPod family, but the iPod functionality will be significantly diversified across price points, with additional WiFi enabled models that will likely feature Apple’s multi-touch technology.

That call is highly likely. I view the iPod touch as an iPhone without AT&T–or at least that’s what it can be if it isn’t shackled.

And there’s the rub: Munster dutifully noted that there are issues with the iPod roadmap. How does Apple differentiate between the iPhone and iPod? He noted:

One potential issue that the company will be forced to navigate carefully is that the differentiation between the iPod and the iPhone. With a sub-$200 WiFi-enabled iPod, the price-to-value equation changes in relation to the iPhone; however, we also expect Apple to release a sub-$300 iPhone in the coming months. Admittedly, the exact way the product lineup will fit together remains unclear. Another issue posed by Wi-Fi enabled iPods is margin pressure from high component costs. iSuppli estimates that the inclusion of a WiFi radio costs Apple roughly $15, and the touch screen display used in the iPhone and iPod touch is roughly $30. For a $149 or $199 iPod, these costs apply margin pressure that will force Apple to innovate around the idea of an Internet connected iPod, which requires a larger screen than current iPod nanos, and an improved user input interface (like multi-touch technology). We believe Apple is developing such solutions that will enable the company to deliver lower cost, WiFi connected iPods in the near future. In turn, this new iPod platform should generate continued growth for the iPod segment of Apple’s business.

If Apple can navigate the iPod and iPhone comparison well there’s a good chance that the iPod’s next iteration will be successful.

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This article has 8 comments:

  •  
    Apr 02 09:20 AM
    No worries. My next iPod will simply do more; it'll be a "Touch", most likely.
    Reply | Link to Comment
  •  
    Apr 02 10:33 AM
    The answer is "iPod Touch" - this is the future of the iPod. While there will still be a demand for smaller 'music only' players, AAPL will build on the iPod name brand with wireless devices that play video and music but more importantly they will do email and internet. This is huge and will likely carry the iPod brand for the foreseeable future...
    Reply | Link to Comment
  •  
    Apr 02 10:58 AM
    Relevant? Geez, you haven't walked on a college campus lately, have you. Watch the kids coming out of the buildings. They're either twiddling with their iPods or cell phones (iPhones included at increasing numbers). The "Touch" will keep the iPod going for quite a while. Replacement cycles? Yup, that'll keep sales going as well. Apple is unstoppable for quite some time.
    Reply | Link to Comment
  •  
    Apr 02 01:26 PM
    How is this supposed WiFi-equipped iPod Nano going to do e-mail and internet with such a small screen. I don't even want to think about the size of a virtual on-screen keyboard. I believe the iPod Nano will be used only to stream or buy music from the Apple Music Store. The iPod Touch will be the mainstream iPod from now on. I sure hate to see the demise of the Classic iPods since I think they are still useful media players with lots of storage. Times are changing so I guess we'll just have to live with Apple's decisions whether we like all of them or not. We keep talking about the death of the iPod, but as long as Apple can start selling iPhones in record numbers, maybe it won't really matter. I will mourn the passing of the terrific iPod Click Wheel interface since it's so easy to control your music without looking at it.
    Reply | Link to Comment
  •  
    Apr 02 01:45 PM
    The NeXt iPod will be larger screen, with video to video conferencing built in and free 'video calling' over the 'net.
    Reply | Link to Comment
  •  
    Apr 02 03:01 PM
    Another irrelevent analysis of an analysis

    Just an excuse to mention the Munster / Piper Jaffray research notes in order to get this nonsense read

    Reply | Link to Comment
  •  
    Apr 02 03:33 PM
    It won't be long before you find iPod Nanos in your Frosted Flakes.
    Reply | Link to Comment
  •  
    Apr 02 07:43 PM
    It's a silly analysis that posits Apple will do what it does not do: Go cheap. Instead, they will go bigger and better:

    mikecane2008.wordpress.../
    Reply | Link to Comment
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