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Apple's core business has shifted to being driven by computer, iPhone sales

In 2001, Apple was a shell of the vibrant company it had been in the 1980s.  Battered by years of losses to Microsoft, the company had little options.  It had virtually no market share in the personal computer industry, and little brand image.  Then the company invented a seemingly insignificant little device that would go on to change everything -- the iPod.

The iPod not only turned around Apple's finances, it redefined the entire company.  Apple went from a tired elitist on the brink of financial collapse to a hip trend-setter delivering music to the masses and with plenty of cash to burn.  In Q1 2006, just 5 years after the launch of the iPod, the iconic device accounted for 55.6 percent of Apple's sales.

However, over the last couple years, something curious has happened -- the iPod has grown increasingly insignificant to Apple.  First there was the so-called "halo effect", in which increased sales of iPods led to increased sales of Mac computers and OS X.  With the halo effect Apple's computers were suddenly hot items.

Then came the iPhone.  The iPhone became an instant hit.  While it did not conquer the phone market in terms of market share, it has sold millions, becoming an instant fixture and a massive new source of revenue for Apple.

All of these changes were thanks to the iPod, but they leave the little device with a greatly diminished importance.  As the iPod has shrunk in size by the year, so has its importance to Apple.  According to analyst Andy Zaky of the Bullish Cross, who beat Wall Street's top analysts in his predictions of Apple's most recent quarter, if you consider Apple's non-GAAP revenue numbers for the quarter, the iPod accounted for a mere 14.2 percent of sales.

Part of why the iPod's revenue share has diminished is simply Apple's growth.  Apple regularly posts large double digit quarterly growth figures.  With the iPod market virtually saturated, this almost guarantees that the revenue share will shrink overtime.  However, it's hard to deny that the iPod has been dethroned among Apple's fans, replaced by the iPhone.

For Apple, this has very serious financial ramifications because it makes the iPod lineup -- which it typically invests massive time, money, and effort into -- increasingly expendable.  The iPod lineup flourished thanks to constant updates that pushed the boundary of cutting edge portable electronics each year.  Now with the revenue stream less relevant, Apple faces the difficulty of deciding how to continue this innovation, when the key motivation -- the iPod driving Apple's revenue -- is gone.

Another key change it brings to Apple is that the company is no longer dependent on its first fiscal quarter -- the holiday season -- for growth.  Apple, during the iPod years would always sees its largest growth in Q1.  A good performance was critical for this time of year.  Now the holiday is less important -- Apple is seeing steady growth thanks to its hearty revenue stream from the iPhone.

Regardless of your stance on Apple, the company has been one of the most iconic, if divisive, figures in the electronics industry.  With the king -- the iPod -- dead, Apple is entering a new era -- the era of the iPhone.  Make no mistake -- the iPod is still king of the MP3 player market -- but it's just not that important to Apple anymore. 



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By h0kiez on 10/29/2008 10:11:46 AM , Rating: 5
The differentiation between and iPod and iPhone is kind of stupid. To say that the iPod is no longer important to Apple is to completely miss that their biggest cash cow (the iPhone) IS the high end iPod. It just happens to make calls as well now. This sort of reminds me of how everyone said that the "PDA" market died. Like the iPod, it hasn't gone anywhere...it just has a lot more functionality not (read: Smartphone) and so they call it something else.




RE: .
By h0kiez on 10/29/2008 10:12:35 AM , Rating: 2
^ last line = "now" not "not".


RE: .
By Brandon Hill (blog) on 10/29/2008 10:18:31 AM , Rating: 2
I think that the "traditional" iPod is no longer important. There's not much more that Apple can do as far as innovation with a HDD-based iPod Classic or a nano with a small screen (just look at the lack of innovation over the past few years with those two product lines).

That leaves the iPod touch -- err "iPhone lite". That is the future of the iPod range IMHO.


RE: .
By Inkjammer on 10/29/2008 12:12:47 PM , Rating: 5
The iPhone will replace the iPod, no doubt. But only once Apple improves battery life. I use both my iPhone and iPod, and the iPhone is a constant struggle to maintain a charge. I couldn't imagine listening to music with it and as a phone/net device.

My iPod 5G's charge lasts me a week with light usage, 3 days or so with moderate/heavy. My iPhone? Yeah, still about 4 hours with moderate/heavy usage.

Until they fix that problem I don't forsee the iPhone overtakin the iPod. Then again, I stll much prefer the storage of the "traditional" iPod. I like having my entire library with me, given I never know what I'll want to listen on a particualr day.


RE: .
By MScrip on 10/29/2008 12:34:05 PM , Rating: 2
quote:
The iPhone will replace the iPod, no doubt.

Except for the 70 million Verizon customers, or people on other phone carriers, or kids and teens who just want a music player.

The iPhone is a great device... but it is just not accessible to everyone. If I was on AT&T, it would be a no brainer. But, I'm not gonna switch carriers to get one. Until then, I will enjoy my Blackberry and my lil ol' iPod Nano.


RE: .
By Inkjammer on 10/29/2008 12:44:20 PM , Rating: 2
quote:
Except for the 70 million Verizon customers, or people on other phone carriers, or kids and teens who just want a music player.
Then you have the iPod Touch... the iPhone without the phone.


RE: .
By headbox on 10/29/2008 1:09:43 PM , Rating: 1
it's more than just switching carriers too- most people are in a multi-year contract that would cost hundreds to cancel.


RE: .
By Samus on 10/30/2008 3:51:17 AM , Rating: 2
quote:
The iPhone will replace the iPod, no doubt.


That's gotta be the dumbest thing anyone has ever said. Except maybe 'I am the decider.' That was pretty stupid too.


RE: .
By eyebeeemmpawn on 10/29/2008 10:21:19 AM , Rating: 2
I agree. The iPod was a cash cow because there was a new version every year or two with "new" features. Now the phone functionality has been added, therefore, the iPhone is the cash cow. (Oh, and of course the overpriced/brilliantly-marketed (depending on your POV) computers make money).
The remaining iPod models are there to fill the niche for those who only want a music player.


RE: .
By MrDiSante on 10/29/2008 10:29:17 AM , Rating: 2
I have to agree with the above poster, you have to look at how many of the potential iPod sales have turned into iPhone sales. I'm guessing that the majority of the iPhone sales are deferred iPod sales - one is definitely not going to get both, they're roughly in the same price range (ignoring the obscenely priced contract, which most consumers aren't about to take into account), functionality and trend status.


RE: .
By archermoo on 10/29/2008 11:01:19 AM , Rating: 2
"Obscenely priced contract"? Heck, my AT&T bill dropped after I got the iPhone. One of the reasons I got it was that the savings on my bill would pay for the iPhone over the course of the contract.


RE: .
By Chaser on 10/29/2008 11:04:18 AM , Rating: 2
Unlimited data, some minutes and unlimited text messaging can make any phone "obscene" I guess.


RE: .
By MrDiSante on 10/29/2008 1:26:20 PM , Rating: 2
I live in Canada and am therefore subject to Rogers.


RE: .
By intelamdlinuxwindows on 10/29/2008 2:29:17 PM , Rating: 3
I was paying £35 for a contract on O2 in the UK. I am still paying £35 per month but now I get unlimited data. I am still within my monthly minutes and texts.

The phone cost £100 to buy, less than an 8gig nano during the summer.

someone want to tell me that it is expensive?

I am not a fanboy, its the first Apple thing I have bought.


This makes sense...
By MrBlastman on 10/29/2008 10:02:07 AM , Rating: 2
Take a look at Sony for instance, in the earlier days (say the 1980's). They were big on low-ticket consumer discretionary goods such as portable CD players/tape players etc., and after time, they matured into higher end TV's, monitors, computers, two wildly successful game consoles and now their latest line electronics.

I think this is a normal progression, and unless Steve's obituary is run for real, they will continue to grow their army of followers. If it is run, I fear Apple will falter and fall into a slump that they were previously enshrouded in.




RE: This makes sense...
By JasonMick (blog) on 10/29/2008 10:12:01 AM , Rating: 2
I think most people buying iPhones and Macbooks could care less about Steve Jobs... He could probably drop dead, and the next day the majority of the users of these products wouldnt really care that much.

Apple has grown from a small contingent of Jobs/Mac obsessed fanatics, to a large contingent of trend/brand image obsessed Apple fans. I don't know which one is better or worse. But the two are clearly different.

As to me... I'm kinda disheartened by the company from an unbiased electronics perspective. My iPod is less than a year old and its developed an annoying habit of pausing for no reason, with no buttons pressed. Maybe I just got one from a crappy batch, but it kinda makes me a little ticked at Apple, esp. since its quality is supposedly so high. Probably switching to the Zune. On the other hand, if the iPhone ever adopted copy-paste, I might consider the switch to it as a phone if Google doesn't have a better competitor by then.


RE: This makes sense...
By MrBlastman on 10/29/2008 10:19:58 AM , Rating: 3
Care or not(and I agree most could care less), Jobs is the vision behind Apple and is the sole reason they have grown into what they are now since his return to the company. Without him, Apple could fall back into a nasty mess of hundreds of creative people with no master brain to control them. Jobs gives Apple its direction, creativity boost and inspiration to move into the places they have gone and are going.

Now, am I an obsessed Apple fanatic? Hardly. My wife owns a macbook - and it pisses me off daily. I find I much rather use my PC or (pick your favorite unix/linux) variant than messing around on the macbook.

Plus, some of the stuff Jobs has pulled with its latest products, such as the iphone, leave a nasty taste in my mouth which prevents me from purchasing it. Things such as the aforementioned copy/paste, kill switch and other intricacies.

But, much like Jonestown needed a Jim Jones to get the people to drink the kool-aid, Apple needs one of their own.


RE: This makes sense...
By kelmon on 10/30/2008 8:18:05 AM , Rating: 2
Jobs may be the "vision" but I credit Jonathon Ives more than Steve. The man has a midas touch.


RE: This makes sense...
By DCstewieG on 10/29/2008 10:43:24 AM , Rating: 2
I think it's wrong to assume people are switching to Macs to be trendy. Maybe the younger folks, some of the kids buying laptops for college, but not everyone.

With Apple in the news more and people seeing them gain marketshare, Macs are becoming a serious option to people who wouldn't have even considered them before. My parents are getting ready to switch, partly because I have and I'm very happy but also because people at work talk about them. I've heard the same from one of my cousins. Certainly none of them are getting them to be trendy. They're simply hearing from multiple people that they enjoy their Macs.

You also can't rule out the effect of the I'm A Mac commercials. To us geeks who couldn't care less about advertising and always look at specs, features, etc., they seem stupid. But they do what advertising is meant to do, put a product in peoples' minds.

Disclaimer: AAPL shareholder


RE: This makes sense...
By omnicronx on 10/29/2008 11:28:06 AM , Rating: 2
quote:
My parents are getting ready to switch, partly because I have and I'm very happy but also because people at work talk about them.
I think you pretty much summed up why your post is flawed. People are buying Apple products because they are trendy, and as such, their family members are following suit because the technical person in the family endorses it. The Ipod caught on in a similar fashion. My entire family got one after they saw my sisters in action.

On the other hand, what I have seen is many elderly buying Mac's because for simply surfing the net, looking at pictures and writing emails is easier out of the box.


RE: This makes sense...
By michael2k on 10/29/2008 12:01:31 PM , Rating: 2
Huh? He said his parents are buying because he is HAPPY, not because he's trendy. There is no indication as to what their coworkers say (trendy or otherwise).

In other words, technical recommendation is NOT trendy, it is called word of mouth.


RE: This makes sense...
By kelmon on 10/30/2008 8:24:05 AM , Rating: 2
?

So what you are saying is that anything personally recommended is "trendy"? I think you just endorsed his point with what you wrote despite saying that it was wrong at the start. If you'd said that your family had bought iPods because they'd seen lots of people with white earbuds then I'd agree but you said that it was after they "saw my sisters in action". That's not buying something because it's "trendy" - that's buying something because you like what it does. Frankly, that's how all purchases should be made. If that's "trendy" then that's fine by me.


RE: This makes sense...
By tential on 10/29/2008 3:06:26 PM , Rating: 2
Also now that the macbooks have better batterylife under OS X compared to laptops under vista it is useful to use a macbook for school. If I'm going to web browse and write papers then I don't need extreme speed or vista. Any OS will work and OS X gives a ton more batterylife than Vista. Not to mention a macbook still boots into vista so it has that functionality to.

And I wouldn't say the macbook is "trendy" as it is stylish. Apple products look good and that's what has continued to win people over. I was won completely over by the Sony Z series and I would say that if there were 2 companies that produced great products that pay attention to detail it would be Sony and Apple. It reminds me of driving my own car and then driving a Mercedes. When you just look at the finished product vs other ones you can see that there was just so much attention to detail that makes you like it even if you have to pay more and may not get as much speed or whatever.


RE: This makes sense...
By Chaser on 10/29/2008 11:14:31 AM , Rating: 2
RE: This makes sense...
By michael2k on 10/29/2008 12:25:52 PM , Rating: 2
Have you tried getting it replaced under warranty?

Or bringing it into an Apple store for "tech support"? They will gladly swap with you if it is defective, I have found.


RE: This makes sense...
By diego10arg on 10/29/2008 7:06:16 PM , Rating: 2
I'd love to buy an iCrowave for my kitchen.


You Forgot About
By pauldovi on 10/29/2008 10:09:35 AM , Rating: 5
iSmug, Apple's chief product since 2000.




RE: You Forgot About
By dr4gon on 10/29/2008 10:32:29 AM , Rating: 3
quote:
went from a tired elitist on the brink of financial collapse to a hip trend-setter delivering music to the masses and with plenty of cash to burn...


Now apple is the "hip trend-setting music delivering" elitist!


RE: You Forgot About
By Chaser on 10/29/08, Rating: -1
RE: You Forgot About
By on 10/29/2008 6:04:58 PM , Rating: 2
im sorry but you using the word "iStupid" made that post look stupid.


RE: You Forgot About
By michael2k on 10/29/2008 6:58:10 PM , Rating: 2
How can you say this without yourself being smug? I don't get it.

In any case, the definition of smug is "contentedly confident of one's ability, superiority, or correctness; complacent."

Why shouldn't someone who is happy with their purchase/product be smug? What it really means is everyone else is unhappy with their product choice. If you are perfectly content with your non Apple product, you would be by definition smug as well.


Invention? Please.
By Denigrate on 10/29/2008 11:37:26 AM , Rating: 4
quote:
Then the company invented a seemingly insignificant little device that would go on to change everything -- the iPod.


iPod was not an invention, it was merely a copy of existing MP3 players. Marketing is why the iPod took off. Granted, the marketing for the iPod was a stroke of genius, but it was not an invention. Al Gore has more of a claim to inventing the internet than Apple does of inventing MP3 players.




RE: Invention? Please.
By michael2k on 10/29/2008 12:09:16 PM , Rating: 2
Did you read what you quoted? He said they invented the iPod, not MP3 players.

If you were around in 2001 when the iPod was "invented" you would know very clearly how superior the iPod was:
Densest MP3 player around: The size of a Rio, the storage capacity of a Nomad
Fastest MP3 player around: The use of MP3 tags and an index meant you could browse the entire library without spinning the HDD; this also helped with battery life
Longest bettery life (for it's size): The use of the index+32MB of ram meant you could cache 20 minutes of music without spinning up the HDD
Fastest upload: While not common, the use of Firewire meant you could synch an iPod 10x faster than a competing Nomad
Easiest upload: With the use of iTunes, synching was literally plug and unplug. No drag and drop, no manual selection of songs, the iPod would default to copying your iTunes music without user interaction. It didn't hurt that iTunes would automatically collect ID3 tag data from the internet and would automatically rip CDs inserted into the computer.
Built in international support: Due to use of ID3 tags instead of an internal filesystem, the iPod had built in international support from day one, including Japanese, Chinese, Russian, Korean, and other fonts.
Firewire mass storage: From day one you could use it as an external HDD; in fact, that was how iTunes copied music onto it, so no extra drivers or services were needed to use it.

Creative wouldn't match these features until 2004, three years later. Microsoft wouldn't match these features+more until 2006, five years later


RE: Invention? Please.
By kelmon on 10/30/2008 8:28:24 AM , Rating: 2
With respect, I honestly believe that the white earbuds did far more for the iPods sales than direct marketing. In the early days all earbuds/headphones tended to be black so the white ones of the iPod stood out from everyone else. It probably helped that celebrities were buying them as well.

Still, it is fair to say that Apple invented the iPod but not to say that they invented the MP3 player. Does that help?


RE: Invention? Please.
By robinthakur on 10/30/2008 12:06:41 PM , Rating: 2
I actually disagree. While there were definitely MP3 players around before the iPod obliterated them, like that massive Creative DAP and Diamond Rios, the iPod was simply better designed, better constructed and didn't feel like a first attempt at menus or design. I don't recall the marketing spend being massive either at the time (I imported one from the US) and you couldn't even use it with iTunes to begin with or with the PC officially. I was one of the only ones with an iPod in the UK for a while and everybody I showed it to thought it was amazing and wanted to know where they could get one, until I gradually started noticing more and more people with white earbuds on the tube once the third generation with the touch controls hit and then the whole thing went kaboom and seemingly everybody bought one shortly afterwards, similar to what happened after the iPhone 3G launched. I wouldn't have bought a Mac back when I got my first iPod as they weren't that hot, but the article is correct in the sense that as the iPod popularised Macs, the idea of buying a mac grew on me until I eventually got a powerbook. I still build my own PC's but I would never suggest that Mac's are not beautifully put together machines which work perfectly with the OS.

I think it would be a shame for the iPod line to disappear completely as i still have several 'pods for different applications as well as the fond memories. e.g. solid state cheapo shuffle for when I go to the gym but don't want the worry of damaging a massively expensive phone, and classic for when I want my whole music collection with me. iPhone 3G for everyday use though as its the best general solution.


iMac
By supersteve1440 on 10/29/2008 10:33:53 AM , Rating: 2
Don't forget about the iMac in 1998.




RE: iMac
By Spivonious on 10/29/2008 11:48:34 AM , Rating: 2
Looking back at the iMac, it really did help to turn a failing company around. It gave them the characteristic of "user-friendly".


1 SKU company - one size fits all
By segerstein on 10/30/2008 7:10:52 PM , Rating: 2
I welcome competition and we are all better off with Apple than without.

Some of their products are really attractive, but when it comes to selecting an item to buy, they only have 1 SKU (if you exclude color variations).

They used to offer 80GB and 160GB Classic iPod (I have the latter), now the offer only 120GB version. Not that I would upgrade to 240GB version if they had it, but it could make a better replacement for a portable HDD.

iPhone - they only sell one model. I wouldn't mind a physically more bulky version with more features and higher price. It's one size fits all policy - like in communism. Why produce two different types of shoes, if one does the job?

MacBook Air - one model.

Dumbing down the product lineup so that the stupid Joe 6pack doesn't get confused. And yes, I'm talking only about concurrently selling SKUs, not outdated models.




By michael2k on 10/31/2008 7:44:39 PM , Rating: 2
Haha, but that isn't communism, that's capitalism!

Communism is where Apple dictates what everyone has; or it means everyone owns production and resources which means everyone shares the same iPhone :)


14% != insignificant
By vgermax on 10/29/2008 10:39:40 AM , Rating: 2
While it's certainly clear that the iPod is no longer as large a contributor to the quarterly revenues, to say it has become expendable overstates the situation. I'd be hard pressed to find any company that would find 14% of its high-margin revenue to be expendable.

As noted by another post, there is a tight connection between the iPod, iPhone and iTunes. (I am aware that iTunes still remains close to a rounding error in terms of overall Apple revenue). The other thing to note would be that 14% represents the Q4 proportion of iPod sales, looking at several years of annual data, the iPod still makes rather significant contributions in fiscal Q1 i.e. holiday shopping season.

While on a relative basis an argument might be made for Apple to divert some resources away from continued iPod development, in absolute terms the development team should stay constant or grow slightly. This is directly related to (as another post stated) the overall growth of Apple's revenue, and the lower relative contribution of the iPod, but not lower absolute contribution i.e. % iPod revenue declines, but $ iPod revenue increases since % Apple revenue increase > % iPod revenue increase.




all mp3 players
By EnzoFX on 10/29/2008 5:04:56 PM , Rating: 2
So all mp3 players are dying, this was to expected, no? Did we all not predict that this would be more of a standard feature integrated into an all-in-one device that we would all be carrying? Hardly surprising, and not bad news at all.




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