iPod Touch, the Recession and the Apple Ecosystem

  • Posted: 23 January 2009 09:10 AM

    Like millions of others, our family is now a Full Apple Ecosystem household.  We’ve all got Apple laptops, iPhones,  AppleTV, plus a number of Apple peripherals.  That’s just the hardware.  We use iLife for all our photos, iTunes for our music, movies and TV, etc.  A substantial chunk of our family’s entire budget now goes to Apple to an extent that would have been unfathomable just five years ago, when we were still PC users and owned just a single iPod.

    The big picture Apple strategy is to convert a substantial share of the global middle and upper middle class into Full Apple Ecosystem households.  If it succeeds in this strategy, it will become the world’s first trillion dollar enterprise.

    Don’t wring your hands over the number of iPhones sold or even the number of Macs sold (both will accelerate later as the strategy unfolds).  Its now the combination of iPod Touches and iPhones that is the key metric to the success of the overall Apple strategy.  In an odd way, the recession may actually help Apple, since it slows down the relatively expensive smartphone adoption rate relative to the iPod Touch adoption rate.  This is beneficial because in 2009 Apple will be competing against a ton of good smartphones, but it has a near monopoly on iPod Touch-class devices. 

    So Mr Consumer in this year of economic woe, hold off on that smartphone purchase if you want.  But that old iPod of yours is starting to act up, isn’t it, and those 15,000 Apps look pretty interesting, and surely $200 isn’t going to break the bank?

    As to the number of iPhones sold, Apple has plenty enough margin to cut the price if they thought that would bring in more overall profit.  Let’s not second guess this, they are the masters of maximizing profits in their business.  The beauty of the iPod Touch is that Apple doesn’t have to sacrifice maximum iPhone profit to accelerate the big picture strategy, because it has the iPod Touch to do that.

         
  • Posted: 23 January 2009 10:55 AM #1

    I enjoyed reading this piece. I’ve said for years it’s not unit volume that matters, but yield per customer relationship. That’s where Apple scores quite high. The company has learned each product purchase isn’t a transaction as much as it’s a deepening of the relationship and the start of a new “conversation” with each of its customers.

         
  • Avatar

    Posted: 23 January 2009 12:43 PM #2

    As Microsoft and Nokia are reporting losses and laying off people, Apple sales and profits continue to surge, taking more market share, and putting billions in cash in the bank in the process.
    The Worldwide sales of the iPhone are just beginning and the China market should open up to the iPhone in 2009.  Even with banking world is chaos, and the drying up of available money for major purchases, such as homes and autos, it obviously isn’t dramatically effecting Apple sales.  A major portion of the worlds population will continue to have have discretionary money to spend even in bad times.
    The bulk of Apple customers seem to be the last to be effected by an economic turn down. They may delay major purchases, but the $199 iPhone, iMacs, and iPods will remain high on their lists of “gotta get one”. This makes aapl is the closest thing you are going to find today that is a near long term recession proof investment.
    When the economy does start to turn around the value of aapl will lead the way back out of this hole Government and Wall Street greed have put us in. It is selling at less than half it true value.
    In the case of aapl, the glass is definitely half full and not half empty.

    Signature

    ldrhawke

    Never Underestimate the Power of Stupid People in Large Groups or of Hedge Funds that Naked Short Sell aapl

         
  • Posted: 23 January 2009 01:30 PM #3

    This is the good part to start soon. Other than with the iPods, the iPhone and the Touch are “computers”. They show the real power of OSX (and the Mac).

    A friend of mine (PC user for a lifetime) got an iPhone. He had the necessary points and needed a new phone. So the reseller gave him the iPhone (not that he went after it). After a few days - and even without exploring the depth of it - he was flat on his back by the ease of use, the simple, logical interface. “Everything is right there where you expect it and when and where you need it” was his comment. “I guess I should check out one of their computers someday”.

    Every iPhone and Touch are the seed for a new customer to the Apple universe. And every new customer is an advocat for the brand. It has only just started.

         
  • Posted: 23 January 2009 01:43 PM #4

    While we’re at it: don’t forget iTunes movies. They will come in Europe soon and attract more people to this Apple Ecosystem with all consequenses.

         
  • Avatar

    Posted: 23 January 2009 03:02 PM #5

    macorange - 23 January 2009 01:10 PM

    ...  In an odd way, the recession may actually help Apple, since it slows down the relatively expensive smartphone adoption rate relative to the iPod Touch adoption rate.  This is beneficial because in 2009 Apple will be competing against a ton of good smartphones, but it has a near monopoly on iPod Touch-class devices ...

    Hey, you’re rephrasing what I said in another thread.  Good to know another fellow forum member see what I saw.  For a fixed number of iPhone + iPod touch unit sale, sell more iPhone means hurt near-term eps but better far-term eps, sell more iPod touch means higher near-term eps but lower longer term eps.

    Signature

    Stay Hungry. Stay Foolish.  - Steve Jobs

         
  • Posted: 23 January 2009 03:54 PM #6

    Mace, what I’m trying to say is, forget about the relative eps impact of the iPod Touch vs. iPhone, near-term and long-term.  The real money is in the multi-year household payments stream from adopting the Apple Ecosystem.  Buying either the Touch or the iPhone equally gets the Apple Ecosystem relationship started.  The recession means relatively more Touches than smartphones sold, which is not a bad thing given how dominant the Touch is in its market.

    And while we can’t discern how many Touches have been sold from the financial statements, the Touch is the only product that Apple is having trouble stocking right now throughout its retail channels, so it is probably still going gangbusters.

         
  • Avatar

    Posted: 23 January 2009 04:06 PM #7

    macorange - 23 January 2009 07:54 PM

    ... The real money is in the multi-year household payments stream from adopting the Apple Ecosystem.  Buying either the Touch or the iPhone equally gets the Apple Ecosystem relationship started ...

    That’s what I said 1-2 weeks ago.  AppStore/iPod touch (and iPhone)/99 cents hit list model.  Sound a bit cryptic I’ve to admit.

    The rate of sold apps is faster than sale of 99 cents download music ... encouraging.  I also noted that iPod touch is now listed as number two in Apple Stores’ top selling iPods ... should be selling faster than iPod in its early stage.

    Signature

    Stay Hungry. Stay Foolish.  - Steve Jobs

         
  • Posted: 24 January 2009 01:13 AM #8

    macorange - 23 January 2009 07:54 PM

    Mace, what I’m trying to say is, forget about the relative eps impact of the iPod Touch vs. iPhone, near-term and long-term.  The real money is in the multi-year household payments stream from adopting the Apple Ecosystem.  Buying either the Touch or the iPhone equally gets the Apple Ecosystem relationship started.  The recession means relatively more Touches than smartphones sold, which is not a bad thing given how dominant the Touch is in its market.

    And while we can’t discern how many Touches have been sold from the financial statements, the Touch is the only product that Apple is having trouble stocking right now throughout its retail channels, so it is probably still going gangbusters.

    I agree with your thinking from a thematic point of view. It’s similar to things I’ve said over the past few years. I don’t agree due to the recession there’s been move away from the iPhone to the touch. I see the two products addressing different markets. However, your overriding point is the important one.

    I remember the roll out of Win 95. It wasn’t that Win 95 was better than the Mac OS (it wasn’t). What propelled its success in part were the numbers of developers, component makers (upgrades) and peripheral makers that had a vested interest in its success. Apple has now turned the table on MSFT and it’s accessories makers and software developers that are pushing the Apple eco-system onto store shelves and products into the hands and homes of consumers.

    It’s vital for Apple to expand the iPod line to include as many app-compatible products as possible as soon as possible.

         
  • Posted: 25 January 2009 01:06 AM #9

    I agree that the iPhone and Touch are different products that target different users. However, I also think it’s true that once a Touch owner, they are ‘platformed in’. The next time this Touch owner has to make a cell phone purchase, he’s highly likey to go iPhone. Given it will likely be a couple of years down the line, he’ll be getting a faster and more capable device as well.  Drop one device from the pocket would be reason enough, but add in a device upgrade and you’ve got an easy decision.

    There is an immense installed base of non-Touch iPod owners, and every one is a potential upgrader to the Touch. I really believe this is starting to happen and for those analysts who call this market saturated, they have must no idea what the Touch offers.  From there, we get an iPhone purchase, and then a Mac if he doesn’t already have one. I’m still waiting for the follow on to today’s Apple TV, which will really be the Apple takeover step of the digital living room. The ecosystem really is magical, but it’s the market penetration of the iPod, compared to the immense marketshare opportunities for Mac, iPhone, and a future digital living room product that will drive the explosive growth of the next decade.

         
  • Posted: 25 January 2009 02:09 AM #10

    cranium, I appreciate your points. One thing to consider: I suspect we will see more app-enabled iPods in the coming year. I don’t think the touch will stand alone for long in the line-up.

         
  • Posted: 25 January 2009 06:19 AM #11

    Right you are DT.  More to come in the Touch line.

    In fact, a lot of folks on this board keep talking about an iPhone Nano, but its the Touch Nano that makes more sense.  Reducing the entry level iPhone price to $149 is not going to exponentially lift sales, because the costly ATT contract still looms large over the recession-wary consumer.  But reduce the entry level Touch to $149 and you’re gonna see a serious uplift there. 

    That kind of price would squeeze Apple’s margin, but its a great investment in the future if we’re right that a Touch owner quickly buys into the Full Apple Ecosystem.

         
  • Avatar

    Posted: 25 January 2009 11:03 AM #12

    One other point that encourages iPod Touch owners to purchase an iPhone is the investment they have made in apps.  All those apps are free to be transfered to a new iPhone.

    Signature

    The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled.

         
  • Posted: 25 January 2009 02:44 PM #13

    macglenn - 25 January 2009 03:03 PM

    One other point that encourages iPod Touch owners to purchase an iPhone is the investment they have made in apps.  All those apps are free to be transfered to a new iPhone.

    On this point: It’s my understanding apps can be shared among users the same way purchased music and movies can be shared via of iTunes. last week we transferred a movie purchased by one household member on their laptop to my iMac and then to the Apple TV for viewing. As long as my iMac is one of the five authorized computers of the iTunes account user purchased items can be shared. All the more reason to buy into one eco-system for music, movies and apps.

         
  • Posted: 25 January 2009 02:47 PM #14

    macorange - 25 January 2009 10:19 AM

    Right you are DT.  More to come in the Touch line.

    In fact, a lot of folks on this board keep talking about an iPhone Nano, but its the Touch Nano that makes more sense.  Reducing the entry level iPhone price to $149 is not going to exponentially lift sales, because the costly ATT contract still looms large over the recession-wary consumer.  But reduce the entry level Touch to $149 and you’re gonna see a serious uplift there. 

    That kind of price would squeeze Apple’s margin, but its a great investment in the future if we’re right that a Touch owner quickly buys into the Full Apple Ecosystem.

    The price points for the iPhone are influenced by AT&T the amount of subsidy to be paid. We could see a $149 iPhone depending on how AT&T desires to position its services in the market place. A lower price point would be a competitive advantage to Apple. I’m assuming as unit volume increases for both the iPhone and the touch (common components on tens of millions of units sold each year) and AT&T’s desire to increase market share and compete with VZ, there will be much discussion between Apple and T on retail price points.

         
  • Avatar

    Posted: 25 January 2009 03:19 PM #15

    I have made a couple of observations on this subject.

    The recession is affecting the whole iPod and Mac eco system.
    For starters Apple sold only 9% more cpus compared to prior year quarter.  Vs. in 1st quarter 08 they increased cpus by 44% from 07.  So in light of all the iPhones, iPods, and more stores their rate of growth cpus sold decreased significantly.  I should point out that in 08 they benefited from Leopard which moved a lot of additional units that quarter.

    In regards to iPods their average price per unit dropped over 20% from 180 to 148 when comparing 1st quarter 08 to 09.
    This tells me that despite the iTouch they sold a lot more cheaper iPods. That fact alone cost Apple $1 Billion last quarter.  As the economy goes further south that number will accelerate along with a decrease in overall units.  I have no evidence but I suspect many of the iTouches sold were to existing iPod customers who upgraded.  So the impact on CPUs sold would decrease.

    If this pattern continues I think by 3rd quarter we might see a contraction in Apple growth.

    I think apple has build an ecosystem in a recession that might see a reduction in growth and possibly a contraction of as much as 10%.  This puts it in a much stronger position then those who are full of debt and see sales drop by over 30%.

    This may explain aapl’s relative strength for now, but if the market further declines it will take aapl with it despite its strong financial position.