TMO Reports - Low Cost iPod May Be Risk Worth Taking For Apple, Analysts Believe

by , 11:00 AM EST, December 31st, 2003

As rumors swirl that Apple might debut a cheaper MP3 device in the next few weeks, industry analysts believe the risk of entering the low-end player market are just as big as the potential pay off. The consensus is Apple will need to find the right balance in a potentially lucrative market space.

Apple has been the leader in higher priced, higher capacity MP3 players with its iPod line of portable units costing US$299 to $499; but one area that it has opted to stay out of is the low-end, mostly flash-memory based devices in the $50 to $170 price range, which primarily makes up players that are flash-memory based at 64MB up to 500MB and can hold only about 200 to 500 song files. Market share has been fractured among five low-end makers, such as Rio, RCA, Samsung, and Digitalway, to name a few. While the low-end market sells a lot of players, its profit margins are small - maybe too small for Apple.

"The low-end MP3 player market has been too iffy," said P.J. McNealy of the Gartner Group. "There hasn't been a quality player with real dominance that just rakes in consumer interest."

Why enter the low-end MP3 player market?

Despite that, however, the low-end market is the most competitive, and it dominates consumer sales, according to Steve Baker, an MP3 player analyst with retailer watcher NPD Techworld. Growth in the market for players around $100 was up 80% in November compared to a year ago, Baker said. "In this new sector, people are 'dabbling'," he said. "They are entering in the low-end just to try out an MP3 player and see if they like it. This might be an area where Apple wants to impress new users and get them hooked on more expensive players to buy later."

McNealy believes Apple is thinking it has to enter the low-end MP3 player market to capture all aspects of the business from the software to the player and prove they can make all MP3 players cool and easy. "There's no one in that industry who doesn't believe Apple has shown how to make a better MP3 player, but Apple has yet to show in the MP3 player OR the PC market that they can do it better AND cheaper. They do that and they'll grab the hearts and minds of everyone."

"We know the iPod has been a great success as a high ticket item," said Joe Wilcox, an industry analyst with Jupiter Research. "If Apple were develop a lower capacity, hard drive-based player at a lower price, and position it appropriately, the company could grab share from flash players without necessarily taking share from it's high-capacity, higher cost players. I think that's one good reason they might enter this space."

Unit strength isn't as strong in this low-end MP3 player category, Baker believes, as dollar strength is in units over $200. But he ponders if Apple might be thinking that if they do things that are based on having mass adoption of their platform, then it's in the company's best interest to find a way to gain unit share as well as dollar share. "I think Apple feels they will do better by going after dollars because they've proven customers are willing to pay higher prices for their products. But you can make a case that the MP3 player market is different than the traditional PC market. If Apple is trying to build adoption of iTunes software and others things based around an MP3 player, those things won't happen and they won't get a stronger position by selling just higher dollar products. They have to sell units and get more of all their products in the hands of customers. You can only do that by competing in all the different pieces of the marketplace."

Be different

The key in Apple entering the low-end market is to look at why Apple has captured the higher-end market, according to Wilcox. "Apple has to extend what they're doing right now," he said. "Extend the 'cool factor' in a down market and offer the same ease of use and flexibility. The key is product differentiation, so Apple doesn't risk sales of its higher end models. Apple came in with something truly innovative and exciting. They need to do that again at the lower end of this market if they are going to prove they are different."

All three analyst believe the difference will be more in 'megabytes for your buck' and less in the ease of use. "In the low-end MP3 market, bells and whistles matter less and price is king," said McNealy. "Sure, consumers want it to work well, but they look at what you're getting versus the competition."

"The fact that Rio and iRiver, for example, offer 1.5GB players in the $200-250 price range, shows that there is an opportunity and the technology is available," said Wilcox. "The feature that will make the difference is capacity. It's possible right now to buy a 128MB flash player for $150-$160. What if you could go to 2GB for $50 more?"

The risk

Baker is concerned, however, that Apple could easily cannibalize their high end models if they are not careful. "Do you cannibalize your sales and give people who would have spent $300 the opportunity to spend just $200 or $150, or are you going to mostly bring in new users? There's a balance here you have to find. Sure, they're not going to get close to 10GB on a low-end model, but you have to differentiate more than that. Features will pay a price on the low-end."

Wilcox agrees, thinking that the balance is offering something different, but still cool enough for consumers that won't pay more than $200. "There is a base of customers who just won't pay what Apple is asking for an iPod right now. What can Apple do to give them a good priced, valued product?"

Whatever the risk, it appears the opportunity for a different product that offers more in the same price range is there for Apple to seize. "Apple may see an opportunity to not just build on its iPod momentum, but catapult itself forward and grab a huge chunk of the portal user music player market by introducing low cost, high capacity players in a market where capacity is very low. If it does come true and Apple introduces what has been rumored, this could be very interesting."