Historically, Apple has used price reductions to fuel unit volume. The demand elasticity allowed the increase in unit sales to outweigh the decrease in ASP, resulting in higher dollar revenue. In a more saturated environment, demand becomes less elastic Unit growth has been slowing: 6% (FY08) vs. 35% (FY07), but iPod dollar revenue grew 10% in FY08 compared to 8% in FY07. Apple was able to increase iPod ASP to $167 (FY08) from $161 (FY07) with the introduction of the Touch. Even as the PMP market has neared saturation, Apple has reformulated its iPod product line which will motivate upgrades to iPod models carrying higher ASPs. Therefore, Apple’s current iPod product line strategy focuses on appealing to non-PMP users, as well as motivating current users to upgrade to higher ASP models. Apple has also positioned the iPod product line so that it’s practical for a user to own multiple iPod models to serve different purposes.
iPod Sales- Historical Overview:
iPods were the primary growth engine for FY05 and FY06, responsible for roughly 58% of Apple’s total revenue growth for both years. In FY07, iPod segment generated only 14% of overall sales growth. As a percentage of total revenue, iPod accounted for 33% (FY05), 40% (FY06), 35% (FY07) and 28% (FY08).
The iPod is becoming less significant for revenue growth due to the success of the Mac and iPhone segments. Apple’s revenue grew 35% in FY08 and 24% in FY07, yet the iPod was the slowest growing segment both years. In the last quarter (4Q08), iPod sales were only 21% of total revenue, and less than 15% not using iPhone subscription accounting. Thus, concerns about flagging iPod sales detrimentally impacting Apple’s overall business are stretched since the iPod is becoming less of a contributor. On a non-GAAP basis, the largest revenue contributing segments are the iPhone and Mac, which are the also the fastest growers.
Historically, Apple has introduced new iPod models at high prices then gradually lowered prices. Unit volume accelerates at lower price points, but the decrease in ASP results in less dollar sales growth. The reverse is true when Apple introduces models at high ASPs, which offsets the effect of lower unit volume on dollar revenue. In a saturated market, demand elasticity evaporates as unit volume is not responsive to lower prices. The focus shifts to motivating current users to upgrade to new-featured models at higher price points. A common belief is that Apple has sold so many iPods, that there isn’t anyone left that doesn’t already own one. In a sense, that’s almost literally true. Those that would enjoy such a device, likely have already bought one. Figuratively speaking, the low hanging fruit has been picked. Therefore, Apple needs to keep introducing new models with advanced features that will entice user upgrades and appeal to new consumers lying beyond the PMP market. Apple has accomplished this with the Touch.
iPod’s first two years on sale, ASPs averaged around $350. Then in Q404 (Sept) Apple cut iPod prices $100 and demand increased considerably. In Q205, Apple priced the “Mini” iPod model @ $199 along with launching the shuffle. This resulted in ASP dropping to $191 in Q2 from $264 in Q1. Unit sales exploded even exceeding the previous period which was a holiday quarter. ASP trended down over the next couple quarters until Q106 when the video iPod was released. ASP rose to $207. ASPs gradually fell over the subsequent 8 quarters, sustaining unit volume growth.
In FY07, unit sales growth was 31%, but revenue growth was only 8%. In 1Q08, Apple introduced the Touch model which carried a significantly higher ASP. This resulted in FY08 iPod revenue growth of 10% on top of 6.2% unit growth. That’s right, iPod revenue growth was higher in FY08 compared to FY07. Thus, even though unit volume has slowed materially, dollar revenue growth has actually increased. I think that point is often missed from investors and the media primarily focusing on unit sales.
iPod unit sales only grew 5% (y/y) for 1Q08, but dollar sales increased by 17% due to a higher average selling price (ASP). After 8 consecutive quarters of declining ASP, the Touch reversed that trend as ASP rose to $181/unit in 1Q08. You would have to go back 6 quarters to find a higher ASP. We have seen a decline in ASP since Q1 mainly due to the price cut for iPod Shuffles, which management stated has had a very positive effect on volume.
In the September quarter (Q4), ASP fell to $150, primarily due to the back-to-school promotion. I surmise that ASP might have been $20-$25 higher otherwise. Going forward, I expect the recent trend of declining ASPs to reverse. ASPs will rise due to the sales mix skewing towards the Touch model. The July opening of iTunes App store, along with the September’s introduction of the 2nd generation Touch model at reduced prices, will substantially boost demand.
The purple shaded area of the sales table highlights the periods where ASPs dropped stimulating unit sales growth. It’s also apparent that revenue growth slowed due to the lower ASPs. The green area shows the periods where ASPs increased significantly; unit sales stalled, but revenue growth accelerated due to the higher ASPs.
The graph below depicts unit volume at various ASPs; the basic demand curve. Due to seasonality effects, data points are plotted according to quarter. Elasticity of demand is quite visible as quantity demanded is barely responsive in the $400 to $250 price range, then turns very elastic from the $250 to $150 price range as the demand curve flattens.
The purple shaded area of the sales table highlights the periods where ASPs dropped stimulating unit sales growth. It’s also apparent that revenue growth slowed due to the lower ASPs. The green area shows the periods where ASPs increased significantly; unit sales stalled, but revenue growth accelerated due to the higher ASPs.
The graph below depicts unit volume at various ASPs; the basic demand curve. Due to seasonality effects, data points are plotted according to quarter. Elasticity of demand is quite visible as quantity demanded is barely responsive in the $400 to $250 price range, then turns very elastic from the $250 to $150 price range as the demand curve flattens.
iPod Product Line:
Primary Attributes:
Touch- PDA, internet/email, wide screen video, games, other software (applications)
Classic- massive storage
Nano- video w/ size and price
Shuffle- size & price
Touch: (iPhone) is the purest form of a converged device with its broad array of applications. It’s a perfect “all-in-one” device that’s small/light enough to be carried on one’s person. A converged device doesn’t totally eliminate the need for multiple devices. Instead, it reinforces the importance of having dedicated devices to accomplish specific needs. I know many consumers myself included) that have an iPhone and multiple iPod models to serve different purposes. A recent LA Times article reports that some iPhone users are also buying a Touch just for gaming purposes.
Classic: Primary feature is its massive storage capacity. It can serve as the chief repository for all one’s media as well as a dedicated media player. I connect my classic to my home stereo system which plays music throughout the house. Substituting my iPhone (or Touch) involves limitations. First, the capacity is much less, but most important, it ties up the device which means I am unable to use the other features.
Shuffle: This is perfect for outdoor and/or physical activity. This model is quite durable and very difficult to damage. Even if one manages to destroy his/her shuffle, then he/she is only out $50. Contrast this with other iPods which are more easily damaged and cost much more to replace. Thus, I’m not too inclined to jog or lift weights with my iPhone. Plus, the Shuffle’s diminutive size, measuring 1 in x 1.5 in and weighing ½ oz, makes it ideal for physical activity. At $50 for 1GB, the Shuffle is very reasonably priced. This expands its appeal to those who are less enthusiastic about music to spend very much on a PMP. For instance, some listen to a basic FM radio Walkman while working in the yard or exercising since they are not particular about which songs they hear. A Sony Sports Walkman (with arm band) runs $44 at Best Buy, thus the Shuffle is price-competitive.
Nano: This has been the most popular iPod due to its attractive price and the improvements in storage capacity. I expect a significant portion of the Nano sales will migrate to the Touch model since Touch prices have come down. Originally, the cheapest Nano was $150, and the cheapest Touch was twice as much, $300. In September, the 8GB Touch was reduced to $230. At $150 one can buy a 8GB Nano, or for $50 more upgrade capacity to 16GB. From the consumer perspective, it may make sense to pay 33% more in price for 100% more in memory. Common thinking is that one might later regret not getting the higher capacity model. However, that has become a less pertinent issue due to increased capacity offered in the base model. 8GB could be sufficient for many people, whereas 4GB was not. Yet, for $80 more one can buy a 8GB Touch which is a quasi-mini computer. Thus, when evaluated from the perspective of- $50 buys more storage, and $80 buys a conglomeration of added functionality, it makes much more sense to buy a Touch now that its price has fallen from $300 to $230. Bottom line, if one is going to spend that much money for a Nano, why not spend a little more money and get many more features? I believe a number of consumers will share the same line of thinking and will be “pulled up” to a higher ASP purchase.
iPod- Product Line Evolution:
One of Apple’s key strengths is innovation and the ability to improve its products in short time. This is evidenced by the 6 upgrades to the Classic model since originally introduced in late 2001. There have been 6 generations of the “Mini/Nano” model since 2004. The advances in functionality have been very significant, all one has to do is compare the Touch to an early iPod model, or just compare the current Classic model to an early generation.
The iPod’s expansive evolution from its roots as basic music player. Early models included remedial PDA features such as contacts, calendar, and notes, yet entries/edits such the once ubiquitous Palm Pilot. adds virtually full internet functionality and email when connected to WiFi. This summer, the App store was launched offering thousands of applications, many are free. This is a radical change which makes the Touch more like a mobile PC. Throw in a cellular radio and the Touch becomes and iPhone. In essence, the iPhone is just a mutation of an iPod, and the Touch is somewhere in between, with the Classic and Nano models still retaining the original iPod characteristics.
The first iPod models only differed in capacity. In 2004, a smaller model “Mini” was added at a significantly lower price point. Being just music players (later video added), consumers would choose an iPod based on desired capacity and price. Most likely, that would be the only model he/she would need/want. The introduction of the Touch changes that scenario with its PDA and web browsing attributes and games.
The iPod took a giant leap with the Touch. The display is much larger than other iPods and includes touch screen navigation. Touch iPods also include WiFi, users can access the web, e-mail, and utilize the widgets to grab updated weather, stock prices, maps, as well as watching YouTube Videos. It also has PDA applications, such as calendar and notes, as do other iPods, but the Touch’s qwerty keyboard significantly enhances functionality.
Touch: (iPhone) is the purest form of a converged device with its broad array of applications. It’s a perfect “all-in-one” device that’s small/light enough to be carried on one’s person. A converged device doesn’t totally eliminate the need for multiple devices. Instead, it reinforces the importance of having dedicated devices to accomplish specific needs. I know many consumers myself included) that have an iPhone and multiple iPod models to serve different purposes. A recent LA Times article reports that some iPhone users are also buying a Touch just for gaming purposes.
Classic: Primary feature is its massive storage capacity. It can serve as the chief repository for all one’s media as well as a dedicated media player. I connect my classic to my home stereo system which plays music throughout the house. Substituting my iPhone (or Touch) involves limitations. First, the capacity is much less, but most important, it ties up the device which means I am unable to use the other features.
Shuffle: This is perfect for outdoor and/or physical activity. This model is quite durable and very difficult to damage. Even if one manages to destroy his/her shuffle, then he/she is only out $50. Contrast this with other iPods which are more easily damaged and cost much more to replace. Thus, I’m not too inclined to jog or lift weights with my iPhone. Plus, the Shuffle’s diminutive size, measuring 1 in x 1.5 in and weighing ½ oz, makes it ideal for physical activity. At $50 for 1GB, the Shuffle is very reasonably priced. This expands its appeal to those who are less enthusiastic about music to spend very much on a PMP. For instance, some listen to a basic FM radio Walkman while working in the yard or exercising since they are not particular about which songs they hear. A Sony Sports Walkman (with arm band) runs $44 at Best Buy, thus the Shuffle is price-competitive.
Nano: This has been the most popular iPod due to its attractive price and the improvements in storage capacity. I expect a significant portion of the Nano sales will migrate to the Touch model since Touch prices have come down. Originally, the cheapest Nano was $150, and the cheapest Touch was twice as much, $300. In September, the 8GB Touch was reduced to $230. At $150 one can buy a 8GB Nano, or for $50 more upgrade capacity to 16GB. From the consumer perspective, it may make sense to pay 33% more in price for 100% more in memory. Common thinking is that one might later regret not getting the higher capacity model. However, that has become a less pertinent issue due to increased capacity offered in the base model. 8GB could be sufficient for many people, whereas 4GB was not. Yet, for $80 more one can buy a 8GB Touch which is a quasi-mini computer. Thus, when evaluated from the perspective of- $50 buys more storage, and $80 buys a conglomeration of added functionality, it makes much more sense to buy a Touch now that its price has fallen from $300 to $230. Bottom line, if one is going to spend that much money for a Nano, why not spend a little more money and get many more features? I believe a number of consumers will share the same line of thinking and will be “pulled up” to a higher ASP purchase.
iPod- Product Line Evolution:
One of Apple’s key strengths is innovation and the ability to improve its products in short time. This is evidenced by the 6 upgrades to the Classic model since originally introduced in late 2001. There have been 6 generations of the “Mini/Nano” model since 2004. The advances in functionality have been very significant, all one has to do is compare the Touch to an early iPod model, or just compare the current Classic model to an early generation.
The iPod’s expansive evolution from its roots as basic music player. Early models included remedial PDA features such as contacts, calendar, and notes, yet entries/edits such the once ubiquitous Palm Pilot. adds virtually full internet functionality and email when connected to WiFi. This summer, the App store was launched offering thousands of applications, many are free. This is a radical change which makes the Touch more like a mobile PC. Throw in a cellular radio and the Touch becomes and iPhone. In essence, the iPhone is just a mutation of an iPod, and the Touch is somewhere in between, with the Classic and Nano models still retaining the original iPod characteristics.
The first iPod models only differed in capacity. In 2004, a smaller model “Mini” was added at a significantly lower price point. Being just music players (later video added), consumers would choose an iPod based on desired capacity and price. Most likely, that would be the only model he/she would need/want. The introduction of the Touch changes that scenario with its PDA and web browsing attributes and games.
The iPod took a giant leap with the Touch. The display is much larger than other iPods and includes touch screen navigation. Touch iPods also include WiFi, users can access the web, e-mail, and utilize the widgets to grab updated weather, stock prices, maps, as well as watching YouTube Videos. It also has PDA applications, such as calendar and notes, as do other iPods, but the Touch’s qwerty keyboard significantly enhances functionality.
The evolution of the iPod line creates a higher possibility that an iPod owner would want more than one model. For example: Touch for PDA/internet & gaming, Classic as repository to store all content and as a de-facto stereo component, and a Shuffle for use during physical activities.
The iPod’s potential market is expanded by the Touch’s new capabilities, which may attract new consumers who had little interest buying a device strictly for music and video. Current iPod owners may buy a Touch for its PDA and web browsing features. The App Store has literally revolutionized the device’s potential, as gaming is becoming a prominent attraction.
iPod Growth Strategies:
iPod Growth Strategies:
Sales can only come from 3 sources: 1) Non-users of product category 2) Competitors’ customers 3) Firm’s current customers. Saturation occurs when the market can no longer expand from the addition of non-category users. Often, a industry shake-out occurs from firms switching focus from attracting new category users, to stealing competitors users. Weak firms are pushed out of the industry and a competitive equilibrium results. Capturing sales from competitors’ users becomes increasingly difficult. A much greater focus is then placed on extracting more sales from current customers. A firm can revolutionize a mature product (making current obsolete) to start a new life cycle.
3 Sources for Increasing Sales:
1. Non-Users- Don’t use product category: Attract new users
The number of consumers, who don’t own a PMP but potentially would buy one, is dwindling. If a consumer hasn’t purchased a PMP by now, the likelihood of purchasing one in the future is relatively low. With 174 million iPods sold and nearly 250 million total PMPs sold, it’s increasingly difficult to keep expanding the market to new users. Yet the market will continue to expand, albeit at a much slower rate.
In short, Apple can’t completely rely on new users to supply the sales volume as in previous years. Apple has been addressing this issue by reformulating its product line.
The Touch will expand the market since it’s not exclusively a music/video player. For those with little interest in music, then the web browsing, e-mail, and PDA features may be attractive. With the copious software available from the iTunes app store, it’s not hard to imagine some Touch owners not even using the music player. Considering gaming capabilities, the Touch is akin to handheld gaming devices, I, and many of you, know them as “Game Boys” even though today’s devices have advanced light years.
The Shuffle’s reduced price (under $50) makes it appealing to physically active individuals that desire to listen to music while exercising, but not very particular about listening to music at other times.
The Shuffle’s reduced price (under $50) makes it appealing to physically active individuals that desire to listen to music while exercising, but not very particular about listening to music at other times.
2. Other’s Users- use competitors’ products: Increase market share
Apple’s iPod has more than 70% of the unit share of the PMP market. That number has held steady for past several years. With such a large share, Apple has already taken business from its competitors, thus less remaining to take now.
The iPod has roughly 90% of the market’s dollar, thus competing devices are the most part cheaper and target more price sensitive consumers. Apple just recently cut iPod Shuffle prices from $79 to $49 making iPods more competitive among lower-priced devices. I expect Apple may slightly increase its market share, but not to an extent large enough to boost sales growth significantly.
3. Current Users- iPod owners: influence to buy multiple devices / buy new device more frequently
iPod owners represent a large source of potential sales. They outnumber competitors’ users and possibly non-users likely to purchase a PMP in the near-term. A focus of Apple’s sales strategy is selling more iPods to current owners since they represent a colossal source of potential sales growth.
Increasing sales from current customers Apple must motivate the user to buy a new iPod more frequently (replacement cycle) and/or buy multiple units.
PMP devices aren’t similar to printer ink, where more usage leads to more sales. Since usage doesn’t cause product consumption, the replacement cycle is longer. Speeding up the replacement cycle is more difficult than other products whereby it’s advised to “change every 3,000 miles” or “lather, rinse, and repeat” and “best if used by x date.”
Device enhancements from adding new features and expanded capabilities speed up the replacement cycle. Hence, the replacement cycle becomes an upgrade cycle. A number of iPod owners buy a new generation model because of better features even when their current device works fine. Innovation is key driver in generating more sales from current users. New enhancements have to be compelling to motivate the upgrade.
The heart and soul of the iPod line has been the Classic, later supplanted by the Nano. Apple’s new Nano generation adds new features, such as the accelerometer, which will stimulate the replacement cycle.
The heart and soul of the iPod line has been the Classic, later supplanted by the Nano. Apple’s new Nano generation adds new features, such as the accelerometer, which will stimulate the replacement cycle.
Stimulating users to purchase multiple units is a challenge for this type of product. There is little need to have more than one PMP device since a user can only listen to one device at a time. Since devices are highly portable, there isn’t a need to buy multiple devices for use at different locations, unlike a TV perhaps. The challenge is to differentiate the product line by form and functionality.
Differentiation of the iPod model line encourages the purchase of multiple iPods vis a vis owning different models. The mini-PC/gaming functionality of the Touch, the reduction in size and price of the Shuffle, and massive storage of the Classic reduces the overlap of features. Thus, there exists a reason to own more than a single iPod model since the functionalities differ. An individual might own a Classic for storage, a Touch for internet/email and gaming, and a Shuffle for physical activity.
iPod Outlook:
Given the recent evaporation of global economic activity, iPod sales are likely to be the most effected Apple business segment. Due to iPod’s commanding market share coupled with its “lifestyle staple“ nature, Thus, iPods will continue to be in demand. A sluggish economy may reduce demand in the near-term, but it creates pent-up demand which will be realized with an up-turn in the economy.
It’s hard to argue that the iPod market is not becoming saturated, as Apple has sold over 174 million units. However, the Touch with 3rd-party applications opens the device to new consumer segments. Originally, the iPod only appealed to those consumers who desired a PMP (personal music player). The Touch offers much more than just a music player. It’s a gaming device, as well as a email and internet browser, and a personal organizer, and much more. With the advent of the iTunes App store, the potential for the Touch’s functionality is virtually boundless.
iPod Outlook:
Given the recent evaporation of global economic activity, iPod sales are likely to be the most effected Apple business segment. Due to iPod’s commanding market share coupled with its “lifestyle staple“ nature, Thus, iPods will continue to be in demand. A sluggish economy may reduce demand in the near-term, but it creates pent-up demand which will be realized with an up-turn in the economy.
It’s hard to argue that the iPod market is not becoming saturated, as Apple has sold over 174 million units. However, the Touch with 3rd-party applications opens the device to new consumer segments. Originally, the iPod only appealed to those consumers who desired a PMP (personal music player). The Touch offers much more than just a music player. It’s a gaming device, as well as a email and internet browser, and a personal organizer, and much more. With the advent of the iTunes App store, the potential for the Touch’s functionality is virtually boundless.
The Touch presents the opportunity for attracting non-PMP users plus coaxing iPod owners to “trade up” to a device at a higher ASP. I didn't think the original Touch offered much value at the relatively high price points along with lacking 3rd party software capabilities. Now with the recent price reduction and iTunes App store launch, the Touch has gained significant potential. Initial demand of the 2nd generation Touch model released in September appears to be quite strong. There were widespread supply shortages during September and early October, and the Touch has continually been the #1 PMP seller at Amazon.com as well as a top 5 bestseller in the electronics category. The iPod sales mix will begin to skew towards the Touch boosting ASP. This will offset any slowing/negative unit growth effects on dollar sales.
The iPhone cannibalizes Touch sales, and probably the reverse is true as well. The magnitude of sales impact on one another is hard to know. I think the Touch provides a powerful gateway to the iPhone. Why carry two devices? The Touch provides an avenue to capture consumers who unwilling/unable to buy an iPhone. For instance, consumers may be locked in a wireless service contract, or use a different phone due to business purposes, may not live in wireless service area, or just don’t use a mobile phone. The Touch lets them become acquainted with a device similar to the iPhone, and when conditions permit, enhances the likelihood that they will purchase an iPhone. I am basing that assumption on the high rates of customer satisfaction.
Even though the Touch performs the same functions as other iPod models, it may not be the best choice for specific applications. This opens the door for consumers to own more than just one iPod model. The Classic can replace the CD player component for a home stereo system. The shuffle is ideal for outdoor/physical activities. The Shuffle should appeal to price sensitive consumers who previously weren’t willing to pay the high prices for iPods. These two factors should strengthen demand in light of a maturing market.
DISCLOSURE: Long AAPL
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