Wednesday, September 10, 2008

Where's my free iPod?

The not dead yet Steve Jobs introduced new iPod models Tuesday in San Francisco. Most of the attention was devoted to the new iPod Nano — shaped like the old iPod Mini — with a bigger video screen and more capacity in two models from $149-$199. It did nothing with its iPod Shuffle line, priced at $49-$69.

It’s interesting to compare how far Apple has come since it introduced the first iPod back in 2001.

Original iPod
iPod Nano (4th generation)
Introduction date
Oct. 2001
Sept. 2008
Mass storage
Hard disc
Flash RAM
5 gb
8 gb
102 mm
90.7 mm
61.8 mm
38.7 mm
19.9 mm
6.2 mm
185 g
36.8 mm
160x128 b/w
320x240 color
Sideloaded music
Sideloaded music, purchased music and video, rented video, podcasts

This is certainly a good, clear trend line for the pace of electronics miniaturization over those seven years.

However, it does raise the question: when will iPods be free? If Apple is pursuing a razor and razor blade model, why not give away the iPods (or at least an entry-level model)?

A preview article Monday in Forbes noted the declining importance of iPod sales
Apple's thriving digital content business gives Steve Jobs & Co. plenty of room to slash the price of the iPod to keep digital music and movie sales growing, and to use the company's increasingly powerful digital content business as a way to segue into sales of tablet computers and other gizmos, as it has with the iPhone.

"With iPod price cuts, Apple is choosing revenue over unit cannibalization," Credit Suisse analyst Bill Shope wrote in a research note Monday.

To be sure, Apple's lineup of digital music players could use a boost. IPod sales are up just 7% from the year-ago period. In part, that's just the law of large numbers at work. However, fresh designs, coupled with a price cut, could reignite demand for the stylish gadgets and keep customers rolling into Apple's increasingly lucrative iTunes store.

That's a business with a strong future ahead of it, even as the hardware business that launched it slows. Apple reported that sales of "other music-related products and services"--chiefly iTunes content--jumped 34.7% to $819 million for the quarter ending in June from $608 million during the year-ago period.
So if the trend of iPods is cheaper and a smaller portion of the company’s revenue stream, why not give one away?

As a practical matter, it will probably never happen, because the cross-subsidy is imperfect. The closest thing we have to a perfect cross-subsidy is the videogame console, where Sony or Microsoft or Nintendo capture royalties on every videogame to pay back the subsidized console. Even so, a few hackers figure out how to use an Xbox as a Linux box rather than a royalty stream for Redmond.

To give away an iPod, it would have to be useless except for playing iTunes content, and that’s not likely to happen. The company could sell an iPod for $100 with a $100 iTunes store gift card, but if it wasn’t locked to that iPod then the buyer would just sell the card on the open market. And there’s always the problem of multiple freebies per person, which seems to be why razor blade handles are no longer free.

There’s also the fact that Apple sees itself as a premium brand, and you never cheapen the brand. The closest they’ve come is to give away nearly stale iPods (i.e. a month before they become obsolete) with back-to-school laptop sales, which is more of a bundle than “free.”

Instead, Apple is holding its price points while the rest of the industry commoditizes, and is intent on proving what a good price discriminator it is, squeezing the maximum revenue out of every sale. Moving up from 8gb to 16gb will cost you $50 for an iPod Nano but $70 for an iPod Touch. Is the memory more expensive? No, people will pay more.

Still, the $400 price point became $150 after about 5 years, and I suspect it won't be long that there will be an under $100 device that plays video. So for most teenagers and their parents, under $100 is closed to an impulse buy.

1 comment:

David Neubert said...

I wonder what the maximum upside on Itunes is? If Apple really wanted to maximize profits and create a good monopoly with iTunes they could open it to other music platforms.