Apple’s iPod touch Dilemma

| Ted Landau's User Friendly View

Pity the poor iPods. They are the equivalent of yesterday's news. At one time, they were the hottest items in the Apple Store — the MP3 players that destroyed the competition. Ads for the latest generation of these devices were everywhere. Now, not so much. Like a former star quarterback relegated to second string, the iPods' glory days are behind them.

Exactly how bad things are is hard to tell. Apple doesn't break down sales of iPods by individual models. This is especially problematic if you are trying to separate sales of the traditional iPods (classic, nano and shuffle) from the iPod touch (which, as an iOS device, I consider to be more closely aligned with the iPhone and iPad).

Apple does post combined sales of iPods. Most recently, Apple stated that it "sold 6.8 million iPods, a 10 percent unit decline from the year-ago quarter." A year earlier, Apple revealed that they "sold 7.54 million iPods, a 20 percent unit decline from the year-ago quarter."

This year-over-year decline has been evident in all quarterly statements for the past several quarters. Clearly, iPod sales will not be the source of Apple's future growth. I expect iPods to take more and more of a back seat in the years ahead. This shift is already underway. Last year, for what I believe is the first time since the iPod was introduced, there were no hardware upgrades to any of the iPod models. For me, the biggest surprise was the stagnant state of the iPod touch. Apple made no attempt to give the touch feature parity with the latest iPhone model at the time (the 4S).

Still, the iPod news isn't all bad. Apple sold over 30 million iPods during the past 12 months. That's not chump change.

Next week, on September 12, Apple is all but certain to unveil the iPhone 5 (or whatever it will be officially called). A few weeks later, Apple is expected to hold another media event where it will announce a smaller iPad (the iPad mini?). At this second event, Apple is also likely announce any upgrades to iPods. What might be in store for the new iPods?

One possibility is that traditional iPods (especially the iPod nano) will add Wi-Fi support. This makes sense in light of Apple's recent push towards iCloud and iTunes Match. With Wi-Fi support, iPods could access iTunes Match, giving the service a wider user base.

iPod touch

What about the iPod touch? Will the touch get an overhaul to match the new features in the iPhone 5? If I had to guess, I would say no; I expect some changes to the touch, but believe it will still lag behind the new iPhone.

This leads to the critical question: Who is the "iPod touch buyer"? What is the market for this device? It is here that Apple faces a dilemma.

The iPod touch vs. the iPhone

Over the past few years, my assumption has been that the iPod touch primarily appeals to people who want the features of an iPhone (an iPod, a camera and an App Store device) but don't want or need the device to be a phone. Included in this group are kids who are too young to have their own mobile phone (a diminishing subset; I expect to see toddlers with their own smartphones soon). This group also includes people who prefer that their mobile phone not be an iPhone or who don't want a mobile phone at all (perhaps content to rely on services such as Skype). For some, the touch can serve mainly as a game machine, an alternative to portable game devices from Sony and Nintendo.

The problem is that as the iPhone continues to gain in popularity, the market for the iPod touch inevitably declines. If you own an iPhone, it's almost certain that you do not also want an iPod touch. Very few, if any, people have a need for both devices.

If you're deciding between an iPhone vs. an iPod touch, the iPhone is increasingly a more compelling alternative. You can buy an iPhone 3G (probably to be bumped up to an iPhone 4 after next week) for free! True, you have to contend with a two-year carrier contract, but you'll need to do that for any subsidized smartphone. The word "free" is a powerful motivator — especially as the specs of the latest iPod touch are not much different than older iPhone models.

The iPod touch vs. the iPad mini

With the arrival for the iPad mini, the iPod touch will be attacked on a second front. The dilemma here, for Apple, centers on how to differentiate the pricing of the two products.

Apple hasn't yet revealed any pricing for the iPad mini. However, most estimates place the entry price as between $199 and $299. Let's split the difference and assume a base price of $250 for a 16GB model (the current capacity of the entry level $499 iPad).

Currently, iPod touch models range in price from $199 to $399. If price matters above all else (which it does for many consumers) and especially if you don't plan to overload your touch with music and such, you're likely to gravitate to the 8GB $199 model. Otherwise, for just a $100 more, the jump to 32GB is well worth it.

If Apple doesn't change the price of the iPod touch, you will be able to buy an iPad mini for less than a 32GB iPod touch. At this price difference, the only people likely to prefer an iPod touch over an iPad mini are those who require an iOS device that conveniently fits in a pocket and who don't own an iPhone. The size of this market could be vanishingly small.

What could Apple do about this?

One option would be to drop the price of the iPod touch. However, this could lead to a price problem between the touch and the iPod nano. An entry level 8G iPod nano sells for $129. If Apple drops the price of the 8GB iPod touch to $149, that's only a $20 difference! Even so, this might work, as the target audience for the nano and the touch are quite different.

Still, I see a lot of potential nano customers here saying: "For $20 more, I'd rather get the touch." Sales of the nano could plummet. Again, Apple might be okay with this; the company is getting your money whichever device you get. But they would probably prefer a clearer dividing line. Apple could solve this by dropping the price of the nano. However, at some point you have to wonder when all of this price dropping stops making sense.

The other option is to leave the iPod touch price alone, which probably means an even faster and deeper decline in sales. As long as Apple doesn't spend significant resources on upgrading the touch each year, this too might work.

Bottom line: the iPod touch market is being constricted by Apple's own products—the iPhone and the (presumed) iPad mini. And perhaps even by the iPod nano. I'm confident that the situation is not dire enough for Apple to consider abandoning the iPod touch altogether. But Apple does have some price compression and market differentiation quandaries to solve. What will it do? We should know the answers in a few weeks.

 

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16 Comments Leave Your Own

Aftermac

I’ve had the opinion for a while now that Apple, upon releasing the iPad mini, should rename the iPod Touch to something like iPad Nano. It probably does need a bit of a feature bump to remain a viable, long-term product. I’m not sure how Apple should handle pricing… The iPod line should probably be consolidated also, but if they’re selling in volume, Apple probably has a while before they need to make any big decisions.

Ted Landau

Of potential interest: A rumor regarding design of new iPod nano and iPod touch: http://www.bgr.com/2012/09/07/apple-ipod-nano-touch-case-leak-rumor/

geoduck

I have an iPod Touch rather than an iPhone. The reason is, as you said I don’t want my iOS device to be a phone. I’d play naked hockey on gravel, I’d walk through a cage full of raptors wearing a meat suit, I’d sit through a Justin Bieber concert, before I sign another contract with a cell phone company. Because of that the subsidized price is irrelevant to me. I can get an iPod Touch for a couple-three hundred while a similar iPhone is around $600. Sure I’d like the better camera but even the one in there is useful. Sure I’d like it to be faster but for what I do it’s fine. It’s good enough. At the end of the year I’ve gotten everything done that I need and want to do and have a massive wad of cash still in my pocket.

Oh and my phone? An LG dumb phone I bought outright and pay for month-to-month for ~$30/month.

dhp

Mee, too - iPod touch (4th gen) and dumb phone,  although I pay by the minute and use the phone very little. However, I am considering an iPhone now that there are non-contract versions available. I’m waiting to see what happens after the new iPhone arrives. If I’m going to pay full price for an iPhone, I’d want the latest model (or a better price for the previous generation).

geoduck

dhp:
The issue is that the cell companies up here require a data plan if you get a smart phone. I don’t want to pay for a data plan. I have WiFi everywhere I go.

Ted Landau

Geoduck and dhp: So….

When it comes time to replace your iPod touch…do you expect to get a new touch or an iPad mini?

gnasher729

I don’t think there is really much of a dilemma. Fact is that iPod sales will be small compared to iPhone and iPad sales, and there is nothing that Apple can do about it. Fact is also that the iPod still produces billions of dollars in revenue per year, which is nothing to sneer at. Unit sales are many times more than Apple TV, which amazingly sold more units in the last quarter than XBox 360.

With these facts, Apple will release iPads and iPhones that maximise iPad and iPhone sales, without considering the effect on iPod sales, because iPad / iPhone is where the _big_ money is. And they will continue to sell iPods to anyone who wants to buy one as long as it makes money. I think they will make some model changes (because buying someone an iPod as a Christmas present that is exactly the same as the one they have is stupid), and supply all those whose iPod breaks with a replacement device.

gl

The easy answer is that it will not an iPad Mini, but an IPod Large(The new larger “iPod”).  Removed the iPod Touch all-together.  iPod Large competes with other small tablets.  iPad holds it own as standard table.  iPhones do it all.

ibuck

I keep my iPT 4G handy around the house and use it’s wifi capabilities frequently: to check AAPL & the stock market, for the weather, for the dictionary while reading (I use this a lot). Whether it’s on the nightstand or in a pocket, it’s very useful to have at my side.

Geoduck, I agree that cell phone contracts are exorbitant and have a prepaid phone (In my case a hand-me-down iPhone 4). It’s simple math ($80 x 24 months = $1920 with a cell phone contract): way more than the price of a non-contract phone and 2 years prepaid. Unless you are constantly using your cell (and probably a bit boorish due to that), it’s not worth it (to me). But I wanted to only carry one device when I’m out, ergo the used iPhone. If there’s no wifi, I get no data, etc. But there’s wifi at the market, at the library, the bookstore, etc. Works out well so far.

I use the iPT4 at home so that my iPhone is always charged and ready to make calls when I’m out.

graxspoo

I think Apple should become a cell-phone company, and use the iPod Touch as the Trojan Horse. First, for a very low fee ($15 a month? ) add wi-fi only calling and SMS/MMS features to the Touch. Then, for a little more you could get what would essentially be an ‘off contract’ iPod Touch with cellular antenna that would only work with Apple’s calling/data plan. Apple could sub-contract the actual tower usage from Sprint, the same way low cost carriers like Virgin Mobil do. The trick though would be to use wifi whenever possible, just like Republic Wireless is trying to do, thus avoiding most cell usage altogether. This would allow the iPod Touch to grow into a “baby iPhone” and hit an entirely new market.

geoduck

Ted;
That’s a good question. Depends on the specs. I could really see going with a mini iPad if the price and specs were better. A larger screen would be nice, and I don’t need to carry my device on my hip so size is not as much an issue.

dhp

Ted, for me the choice will be iPod touch or no-contract iPhone. Whichever I choose I will want to carry around in my pocket. I have pretty much full access to an iPad 2 (owned by my wife’s employer) and honestly, I rarely pick it up. I really liked the original iPad with 3G my wife had—perfect for travel—but they “upgraded” it to a newer, Wi-Fi-only model.

I would love an iPod touch with access to the iPad data plans.

Joe

I Love my iPod touch 4G.  As long as the cost for service is so high for the iPhone I will never buy one.  I spend $80/year for my cell phone service and never use all my minutes.  I actually add minutes.  I would ONLY get an iPhone if I could pay just for the service I use. I pretty much only use Wi-Fi it’s faster and I’am not a kid so I don’t run the streets with a need for cell service. Sure cell data service would be nice to have but it is not worth the $1200/year cost for the few times a year I might use it.

mrmwebmax

+

As someone who swore to avoid cell phones at all costs—what? always online?—that changed with my first iPhone. It was the iPhone 3, then iPhone 4, and now iPhone 4s. Ditched my land line long ago, and will never go back to not always being 24/7 online and available. I remember when I lost my original iPhone 3 (in a bar, swear to God), only to find it there the next morning: That few hours without connectivity was sheer hell.

My point: As more and more people graduate to smartphones, more and more will wonder how they ever got along without one. That means single-use devices will be desired less and less. Point-and-shoot digital cameras are a perfect example: Why buy one when the iPhone in your pocket can take just-as-good pictures, and its always with you?

Same for the iPod Touch and, dare I say, all iPods. Yes, they still sell well, as do some point-and-shoots, but as more and more people gravitate to smartphones, both point-and-shoots and iPods will see themselves going the way of the dinosaur.

Long before my first iPhone, I had an iPod. It’s been so long since I’ve used it I can’t even remember which model it is, but it was the HD-based one that came out after the iPod mini was discontinued. I loved it, it was great, but compared to an iPhone? Primitive.

The iPod Touch will remain so long as there are people out there who don’t want smartphones. As that market continues to shrink, so, too, will demand for iPods of any kind.

As for the impending iPad mini (or whatever it will be called), if it is priced around what the iPod Touch is priced, I again (said this a while back) say that it will be the death of the iPod Touch. Too many things are converging against the Touch for it to survive: Smartphone adoption, 7” tablets in the same price range, etc.

Apple is no stranger to killing off popular products to release a new one that trumps competition: The iPod mini was the hit of its day and Apple KILLED it on purpose when they released the iPod nano. SJ said so himself at the nano keynote.

I expect the iPod Touch will not be discontinued as such, but will die a slow and deserved atrophy, as people either move to iPone, iPad mini, or both.

xmattingly

I’m with the guest, Joe. Last time I checked, for a two year contract with an iPhone, you’re basically paying $2000: the price of a high end laptop. The new no contract plans (like Cricket) are a little bit nicer, but until there’s a pay as you go plan available, I’m not willing to throw in.

For my 2ยข regarding iPod Touch vs. iPad Mini: I will definitely buy a Mini to replace my iPod if 1. the price is reasonable (we’re talking $400 or less), and 2. if it’s portable enough for the way I will want to use it.

mhikl

I love my iPod touch. It plays music, holds books both for the eyeballs and the ears and on it I make notes. I’m an “It’s Rainmaking Time” fanatic and every episode is download-ready for a listen 24/7. And most of all, my iPt is small enough to carry anywhere and always, and very willing to snap pictures on the go. It’s the little things in life that make the iPt my miracle toy leaving my iPad for more serious stuff. Voice transcription for notes would be the cherry to its other recording capabilities.

Yes, this little puppy is an entry gate for little and not so little people. Once bitten by the Apple mite, the path is set for much bigger things, say the iPhone, say the iPad. In this there is no competition. Sometimes having a loss-leader pays gangbuster later in the game. The thing you did not mention in your article, Ted, is the affect on the brain from phone radiation, a growing concern, and for this reason we use pay as you go feature phones for emergencies only. With WiFi shut off, I believe my iPt is pretty safe for the little grey cells and hip bones.

My suspicion is that Apple will monkey with the GBs. An iPt at the 32Gb configuration in the two hundred bucks range and skipping any other config would solve the issue of price competition with its siblings and the new mini, would it not?

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