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. 

"This is about the Internet.  Everything on the Internet is encrypted. This is not a BlackBerry-only issue. If they can't deal with the Internet, they should shut it off." -- RIM co-CEO Michael Lazaridis
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