Apple Must Focus on Getting People to Replace Their iPods

Like the passing of the seasons, a seemingly perennial constant is that time each year when people wonder what the new iPods of the year will be.  It is funny that such a small device should have such a big effect on the consumer, but the iPod truly stands alone on the impact on the music player industry and on the company that created it.

However, after years of innovating, shrinking, and revamping the device, its growth is finally slowing. As it nears market saturation, Apple is being forced to ponder the future of the iPod — the device that is linked so inextricably to its recovery and success.  What does the future of the iPod hold?

It appears that Apple is focusing on computer-like iPods, be they the iPod Touch or the iPhone, for its next generation of products.  For better or worse, the company has made the decision that touch screens are the wave of its future, and it will try to market them heavily to its masses.  The sentiment is heard on the lips of Greg Joswiak, Apple’s vice president of worldwide iPod and iPhone marketing, who at the unveiling of the higher capacity iPod Touch remarked that it was “a new type of device”.

However, while Apple has focused on the touch screen industry analysts say that it needs to protect its low end by continuing to innovate.  To do this they suggest that Wi-Fi be added to existing models, that service bundles are offered, and finally that Apple put OS X on the smaller iPods as soon as the hardware permits.

The need for Apple to revise its strategy is extremely evident from the sales numbers.  Where the 2006 holiday season saw a hardy 50 percent unit growth, the 2007 season only saw a growth of 5 percent.  Fortunately for Apple, its revenue growth remained virtually constant, only falling one point to 17 percent growth in the 2007 holiday season.  This suggests two things; one that people are switching from older to newer iPods (which would not grow the total number of units) and that they’re adopting cheaper and more efficient manufacturing.

While some customers may resent Apple a bit for its growing gross margins on its hardware, the business strategy is invariably working.  And so is Apple’s heavy marketing of the new iPod lines.  A recent survey by CNET suggests that as many as 88 percent of its readers have an iPod.  More telling 34 percent have owned an iPod since 2003 or 2004 and an impressive 52 percent have owned two or more iPods.

It seems clear from the numbers that people aren’t buying more iPods, but are replacing old ones with newer models, a key to Apple’s ongoing success.  More good news for Apple comes in the survey of what iPod people want next. A healthy 60 percent wanted the iPod Touch, showing that Apple is correctly predicting the trend towards touch screens.  Further, 68 percent of people said that if given the option of an mp3 player/phone combination they would select the iPhone.

It seems people are drawn to the multifunctional nature of the Touch and iPhone, which allow users to send email, surf the web, run games, and run business and office apps.  Interestingly, despite the apparently strong desire for touch screens, people’s single largest request for change in the iPod is more storage capacity.  While Apple does lead the market in storage with its 160 GB “Classic” video iPod, apparently users still are feeling the need for more storage, particularly on the lower end of the line.

Apple does have an additional piece of good news — while its growth may be stagnant, no one is making meaningful gains on its vast lead in the MP3 market, even on the low end.  This suggests design, brand name, and storage space trump the feature set, as many competitors such as the Zune or offerings from SanDisk have more options such as FM tuners and voice recording.

Some analysts believe, though that as the low-end market grows, Apple may lose its grip as brand name will appear less.  Said CNET‘s Tom Krazit in his analysis, “The iPod brand is easily the strongest in the portable music player world, but as the low-end of the market spreads out into countless niches (think USB drives), Apple would have no real advantage over other consumer electronics companies that know how to crank out widgets in huge volumes.”

Ross Rubin, an analyst with The NPD Group also fears that storage growth will soon outpace growth in music library size, at which point storage will become less of an advantage for Apple and it will have to rely more heavily on its reputation for being an innovator.  He believes Apple is correct in focusing on large-profit-margin, innovative products such as the iPhone and iPod Touch over more traditional designs.

Outside of hardware change, Rubin suggest one way Apple can make its products more attractive is with service bundles.  With only 13 percent of people surveyed saying that they would like to by an iPod Shuffle or iPod Nano, Rubin says something must be done or Apple will lose customers unwilling to pay the $299 for an iPod Touch.  He says that though Apple has long resisted it, an easy answer comes in the form of a subscription service.  Nokia recently adopted such a service, offering free unlimited MP3 downloads with all its music phones.

Still more potential for growth exists in the possibility of low cost music rental, which would allow users more of a trial before buying.  Such an idea would take an adjustment in the consumer mindset, but could be done.  Also Apple could continue grow its existing video rental services.

In the end, Apple may never be able to hope to repeat the dynamic growth that put it on top of the market.  But it can hang on to what it has.  While the Nano hurt the sales of the iPod Classic, and discontinued the iPod Mini it became Apple’s best seller.  Likewise, the iPod Touch may be damaging to iPod Classic and iPod Nano sales, and may even undermine sales of the similar iPhone, but at least Apple is still selling units.  As Apple COO Tim Cook says, he’d rather Apple cannibalize Apple than someone else.

The season change and Apple continues to rely on new models and its brand name to do the trick.  But with market saturation, the company will have to continue to find ways to innovate with new services and direction or risk getting undercut by generic competitors.