Apple’s iPod is Not Dead and Not Dying

Apple’s iconic iPod digital music player is credited for reviving the company and helping the it dominate consumer mind share and spending over the past decade. It still amazes me when I think about all of the MP3 players and companies who failed and the music stores that are now on life support and how badly Apple has hurt Sony, Microsoft and other companies who bet millions on defeating the iPod. One of my greatest fears has started to come true where analysts are now throwing the notion out there that the iPod is dead or dying.

We all knew this was coming when analysts first asked that same question upon the introduction of iPhone then iPad but now we’re at a point where it’s clear that the iPod isn’t key to Apple’s success in earnings and shareholders don’t have to worry about consumers growing tired of the iPod or music in general (as if that’s ever going to happen). The iPhone, iPad and Mac are the largest legs of Apple’s business and iPod is just iPod.

Of course, Apple has sold hundreds of millions of iPods and a solid 50 percent of its stock value as it skyrocketed from 2004-2008 is due to the iPod, but its impact on Apple’s bottom line is dropping with every new iPhone release. I was enthralled in a piece featured on AppleInsider written by Andy Zaky. The piece took a logical and very up front look at Apple’s iPod segment in how it relates to the market, Apple’s bottom line and raw sales and opened my eyes to just how well the nine year old music player is holding up.

Before I review a bit of the findings in Andy’s research, I’d like to point out that Apple is approaching a 10 year dominance in a huge market with one product line. Yes, I know the iPod has seen many revisions and form factors but it’s digital music and Apple still maintains 70 percent market share for MP3 players. That’s incredible when you think of the thousands of competitors and dozens of music stores aimed directly at Apple and let’s hope the same fate is in store for iPhone. If you ever had an argument whether a closed system is good for the consumer, look no further than iPod’s success.

Health of the iPod and Apple’s bottom line

Analysts who measure Apple’s stock value based on trends, market health, future products and current sales will look at this figure when calling the death of iPod:

This chart shows the iPod’s decline in percentage of Apple’s revenue has dropped from 55 percent during 2005′s Winter sales to 24 percent upon the introduction of the first iPhone. Naturally, analysts were freaking out a bit and today’s 8.6 percent for a product that once made up for half of their revenue is a reason to be quite worried. Prior to the iPhone 3G’s release in 2008, I did see a few reports that spurred a sharp decline in AAPL that year, mostly because the iPod was selling to a saturated market where everyone that wanted one already had one and features like an FM receiver weren’t enough for most users to upgrade.

Of course, anyone reading this blog knows that the iPhone has iPod built right in and, of the iPods sold, the App Store enabled iPod touch completely dominates sales compared to the nano, shuffle or classic models. Apple sells an iPod every time you buy an iPhone, but it’s clear that the iPod isn’t the golden egg for Apple any more, but have people stopped buying iPods? Is the iPod dead? This data proves otherwise.

Compared to 2006 numbers, when the iPod was nearly half of Apple’s quarterly profit, iPod sales have actually risen from 8.5 million units per quarter (non-holiday) to an average of 10 million per quarter. This is huge and over half of iPod sales in the past year (based on rumors and Apple Store public iPod sales chart review), the iPod touch makes up for a majority of iPod sales. The iPod is stronger than it was in 2006, which was a year before the iPhone came out. The iPod isn’t dead or dying; it’s stronger than ever.

Why does it feel like the iPod is dead?

I may have a bit of bias here, but in big cities, the iPod is a device you simply don’t see anymore. Instead, you see one or two iPods for every 10 iPhones or iPads. The reason is that the iPod is a part of our touch devices and we don’t need the extra device in our bag or pocket.

Another fact is that, other than Apple’s yearly iPod event (that happens every September like clockwork), Apple doesn’t push the iPod at every keynote like it did before the iPhone. Now, the App Store, iPhone and iPad get all of the attention, and rightly so. You may pay $199 for an iPhone 4, but that’s after carrier subsidy. In fact, AT&T (s att0 pays the rest of the bill, which to Apple is between $499 and $699 for every iPhone sold for a product that costs less than $200 in parts to build, so profits of the iPhone are significantly higher than the sale of an iPod nano, and paired with Apple’s 30 percent cut of the sales of every app you buy for the iPhone and it’s obvious which device is more profitable.

It’s too early to call the death of iPod. Its impact on Apple’s earnings may get smaller, especially if the iPad sales continue to rise and Apple’s next TV appliance is the killer iOS based device that we’re all hoping for, but 10 million units a quarter is not small potatoes and iPod continues to do well for the foreseeable future. That shrinking percentage of iPod’s impact on Apple’s sales is only because the amount of money Apple is making from its other segments is growing at an astronomical rate as seen here:

This was mostly a summary of the data Andy reviewed over at AppleInsider. Both parts one and two are worth a read for anyone that follows Apple closely and enjoys data that backs up the usual speculation.

Do you still own an iPod? Do you also have an iPhone and do you use both on a daily basis?