iPod vs iPhone - Growth Potential Analysis

"BusinessWeek" reports citing NPD's data that iPod sales fell 9% between March and April (year to year) despite the fact that the average selling price dropped 11%. The inevitable process has begun.

Gene Munster from Piper Jaffray, whose record of projecting Apple's results is quite impressive, foresees a yearly decline of between 5 and 14% in the sales of iPods. If it turns out to be true, it will be the first time in history when there will be lower number of Apple's multimedia portable players sold year to year. Mr Munster believes Apple will report between 9.5 million and 10.5 million iPods sold this quarter (ends in June). Apple sold 11.01 million iPods in previous quarter (an increase from 10.64 million a year earlier).

Interestingly enough, the average selling price of the iPod has been on a downward trend lately. This is mainly due to the new iPod shuffle - the latest player in Apple's production cycle that generates a bigger part of iPod revenues now. Average turnover from the sale of one iPod was USD 151 in the second quarter of 2009, which means the average selling price has fallen 20% from USD 171 in just a year. According to Mr Munster's calculations, it will fall 7% more this quarter to about USD 140 dollars. It will give Apple USD 1.47 billion worth of quarterly revenues. A year ago (at the end of June) it was USD 1.68 billion.

The iPod is a product that is already on the right side of a product cycle chart. A marketing name for such products is "cash cows". Their sales dynamics is low but they enjoy high market share, which still makes them attractive. The iPhone is a perfect example of "star". Stars are products that show impressive sales dynamics and consequently increase their low market share.

"Cash cows" and "stars" call for completely different marketing handling. The iPod market defined as mp3 players is shrinking fast. You can see it in analysts' projections and quarterly results presented by Apple. iPod share in Apple's overall turnover structure is lower and lower and the times when the iPod was the only product that kept Apple afloat seem to be fading away. The iPod accounted for 55.6% of Apple's turnover structure yet in the first quarter of 2006. It now accounts for no more than 12 - 13%. Apple can be praised for how skilfully it switched from one-product-based turnover structure to multi-product-based one with the introduction of the iPhone. It was truly a masterstroke. Apple can still successfully develop the iPod line (the iPod is still an integral part of the iPhone) and the company does not seem to be making defensive steps around the iPod, which rarely appeals to investors and media.

What does Apple do with the iPod then? It launches slightly modified versions of iPods in the two cheapest market segments (nano and shuffle) practically without any marketing back-up excluding natural marketing buzz that accompanies the majority of Apple-branded products, which the Cupertino-based company learnt to incite quite skilfully. It is not accidental that Apple upgrades the cheapest iPods because their short-term market potential is higher (clients find it easier to spend a couple dozen dollars than a couple hundred). This results in short-term and possibly one-time jumps of sales. According to NPD's data published shortly after the debut of the new iPod shuffle, its sales soared 50%. Chances that this high sales dynamics would be kept were pretty low, which is reflected in the latest set of data from NPD cited by "BusinessWeek". However, Apple will be likely to minimise sales declines for long months to come with such moves.

The iPhone is a product of high development potential, which calls for high financial layouts for distribution and promotion. ChangeWave Research has recently asked 4292 smartphone users about their future purchases. 30% of them plan to buy the iPhone. This is slightly less than BlackBerry (38%) but much more than highly anticipated Palm Pre (4%) that is to debut on June 6. When asked about a new iPhone OS 3.0, one in five responders found it a decisive factor in their future decision.

What does Apple do with the iPhone then? It introduces thorough changes to iPhone OS that surely devoured more financial resources and human labour than upgrades of iPods. Apple regularly backs up its "star" with new TV ads in the most attractive advertising blocks. There are press conferences organised when every single detail is neatly discussed to raise PR hype around the iPhone. Every other week Apple informs about the new markets its smartphone is available on. If - what is being suggested more and more often - China and India join the crowd, weighted distribution (presence in places that generate the bigger part of sales) will be close to ideal.