Needham says Apple letting iPod touch cannibalize iPhone sales

[AppleInsider]

Apple knowingly gave up as many as 1.5 million iPhone sales during the holiday quarter to establish the future of the iPod as a mobile device, according to investment note issued on Monday by Needham & Co.

Analyst Charlie Wolf bases his observations around statements made by Apple chief operating officer Tim Cook during the iPod maker's latest quarterly results conference call; the executive referred to the iPod touch as becoming a "mainstream Wi-Fi mobile platform" rather than just a touchscreen version of the iPod. The company's willingness to reduce the feature and price gaps between the iPhone and iPod touch indicates that it's ready to trade short-term losses for long-term growth of the iPod as a general device, especially among existing iPod owners trading up from older players.

"If the company is successful in this endeavor, it would provide a compelling upgrade path for the estimated 85 million people who already own iPods," Wolf says. "And it could attract new users to both the iPhone and the iPod platform as well. The company appears willing to risk the cannibalization of a significant number of iPhones to accomplish this."

Apple's decision also costs the firm a significant amount of long-term profits, the Needham researcher says, as it meant losing as much as $250 in subscriber revenue shared from AT&T over two years.

Without the iPod touch, Apple may have sold as many as 4 million iPhones in the last quarter alone, according to the research note. During observations at Apple's Fifth Avenue store, many customers were said to have considered both the iPhone and the touch on an equal footing. Some Europeans may have felt pushed into buying the iPod touch after the iPhone's 1.1.2 update made it harder to unlock the device for unsanctioned carriers, Wolf argues.

The increased support for the iPod touch may also be a calculated risk that future iPhone updates will negate any immediate hits to the current product's success. Needham predicts that Apple will release an upgraded, 3G-capable iPhone at the same price in the summer and will drop the price of the current model to $299 at the same time, also dumping current iPod touch prices to $199 and $299.

Altering prices this way would maintain the price difference between iPod and iPhone but would provide stronger incentives to buy the higher-end -- and importantly, more lucrative -- handheld device.

[Mr. H]

Who cares if one Apple product cannibalises another?

The more concerning thing is that Apple is letting Walkman phones and the like cannibalise sales of iPod Shuffle and Nano. Where's the iPhone Nano to compete with the more run-of-the-mill mobile/mp3-player hybrids that most people use?

[zanshin]

Given that the Touch costs significantly less and now does just about everything I want from a mobile media device, I have no iPhone envy at all. Email is more useful to me than yakking away costly minutes on a cell phone that has far less connectivity than wireless internet access provides me. I can get a Touch and a perfectly useful cellphone for when I need instant communication feedback for a lot less money than the AT&T plans required for an iPhone. Having been born with two hands, it isn't inconvenient in the slightest to reach for a phone while using my Touch. And I don't run down my Touch's battery to make calls.

[aedwards]

If they want to really see the iPod Touch cannibalise iPhone sales, put Bluetooth in it. If I could use Bluetooth to connect to a mobile phone for data away from WiFi, I'd get one.

Connected to a basic 3G or HSDPA phone, it would out-run the iPhone too. Which is why it will never happen.

Alan.

[rdas7]

Well this makes sense, given that the iPod platform:

a.) gives Apple better margins (they make more money per Touch than per iPhone, presumably).

b.) is headed towards iPod Touch (hence the renaming of the non-Touch, 'Classic'). As in, for all you retro fans out there

c.) is competing against itself. Not sure it's cannibalizing sales, so much as just distributing the food. What's good for the iPod is good for Apple. What's good for Apple is good for the iPhone. Hakuna matata.

Ultimately, only Apple knows how this will all play out, but my bet is that in 5 years time, the iPhone and iPod line will merge into simply 'iPod', and we'll look back on the days of iPods without touch screens with the same nostalgia as we'll look back on iPods that only had 160GB drives and couldn't even make calls.

[parky]

Originally Posted by rdas7

Well this makes sense, given that the iPod platform:

a.) gives Apple better margins (they make more money per Touch than per iPhone, presumably).

b.) is headed towards iPod Touch (hence the renaming of the non-Touch, 'Classic'). As in, for all you retro fans out there

c.) is competing against itself. Not sure it's cannibalizing sales, so much as just distributing the food. What's good for the iPod is good for Apple. What's good for Apple is good for the iPhone.

Ultimately, only Apple knows how this will all play out, but my bet is that in 5 years time, the iPhone and iPod line will merge into simply 'iPod', and we'll look back on the days of iPods without touch screens with the same nostalgia as we'll look back on iPods that couldn't make calls.

Apple make far more money from the iPhone rather than the iPod Touch.
This is due to the fact that each iPhone generates money from Apple every month in payments from the Phone companies to Apple, this is not the case with the iPod Touch.

While the iPod Touch may make more money at the time of original sale than the iPhone, in the long run that will not be the case.

All this is made clear in the original story, hence the lost revenue that is stated.

[solipsism]

While this is true, it's even truer* that he iPhone has cannibalized nearly 4M iPod sales. I now have one device where before I had two, and I don't know anyone who hasn't done this.


* This isn't fact, but an opinion based on my observation.

[Banalltv]

There's more to it than that, it also allows Apple to make money from the technology in countries where the iPhone isn't available and It allows them to be in less of a hurry to negotiate deals for selling the iPhone in these countries.

Lots of people who want an iPhone will buy the Touch while they are waiting.

[wizard69]

I think it is about time to bury the word cannibalize here at AppleInsder. The word just most certainly hackneyed but even worst is simply wrong to apply in this situation.

The problem is this a product can't cannibalize another product if you would not have gotten the sale anyways. The problems with the iPhone isn't the Touch but rather the AT&T contract that comes with it. As soon as the carriers and Apple realize that people are rejecting such arrangements the better off we will all be.

As nice as the Touch is if Apple really wanted to get sales to take off they would get off their widening behinds and address the issues that many have been highlighting for some time now. That is things like screen size and Bluetooth. Not the sloppy Bluetooth support in the iPhone either but a real honest to goodness bluetooth implementation that supports all the common profiles. Apple can call the current Touch their internet tablet but frankly it is only partly there. Hopefully this is a sign that Apple realizes they have huge potential here with respect to the tablet market.

In any event I really do hope that the next rev to Touch is more substantial than just a memory upgrade. Of course more Flash is needed but I want a device that can better support more applications. That means more RAM memory, Bluetooth and even a host USB port. Pack that into the current device and one with an enlarged screen and Apple will have to look beyond china for enough manufacturing capacity.

Dave

[Booga]

I think it is about time to bury the word cannibalize here at AppleInsder. The word just most certainly hackneyed but even worst is simply wrong to apply in this situation.

I think you misunderstand. What AppleInsider is saying is that iPod Touches are literally sneaking up on and biting the heads off of 4G iPods, then skulking back into the shadows while slowly munching away.

[silver99]

Yes, Apple does make more on the iPhone than the Touch but eventhough they make less profit from the hardware on the Touch, they still make ongoing profit from the iTunes store.

Apple is what they are today because of the iPod (not the iPhone). The iPhone has helped them grow but their roots are still firmly placed in the MP3 market.

[hledgard]

I support Dave's point. I would love an iPhone, but it is clearly the AT&T contract that is a show stopper. I would have to pay significantly more per month (at least $50) to switch from Alltel to AT&T.

[der passant]

I disagree that the iPod Touch competes with the iPhone. As soon as you are out of wifi range its just an iPod. It can't do anything.

Now if edge service was built in it would give the iPhone a run for its money. Image if edge gave you unlimited wifi for $20 a month. Would you have purchased an iPhone. I'm not sure I would have.

[pmjoe]

If Apple wants to sell more iPhones, I'd start selling an unlocked iPhone for slightly more $$$ rather than worrying about what the iPod touch is doing to the iPhone's sales.

If I could buy an iPhone and try it out as an iPod touch first, then maybe I'd think about signing it up for a carrier of my choice. I'd be far more likely to think about spending a little more for the iPod with more features (iPhone) in that case ... but when trying it out entails $79/month for 2 years ... forget it.

[tundraboy]

This 'cannibalization' thing is a crock that only analysts care about because they feel that they have to say something even remotely analytical. Manufacturers don't really care as much about it. What they worry about is their competitors 'cannibalizing' them. So they try to fill all the market segments and guess what? If you fill the market segments properly then you will end up cannibalizing yourself. If your products aren't cannibalizing each other then you are leaving gaps that your competitors can fill and then their products will cannibalize yours.

[rspress]

Originally Posted by AppleInsider

Apple knowingly gave up as many as 1.5 million iPhone sales during the holiday quarter to establish the future of the iPod as a mobile device, according to investment note issued on Monday by Needham & Co.

This is total bull. The iPhone and iPod Touch are two different devices. When Apple dropped the price of the iPhone the pretty much made which to choose a non-issue. Those that wanted the iPhone could get the iPhone. Those that did not need the cell phone could opt for the iPod Touch. Most of my family got the iPhone. Since I would be switching to an iPhone later on I went with the iPod Touch until that happens. I would say that wolf's figures are over inflated by at least 10x. The price difference between the two may have account for 50,000 to 100,000 sales lost to the Touch, if it is even that high.

Everyone I have talked to either got the iPhone or had a logical reason for getting the iPod Touch instead. The number one reason was that they did not need the cell phone features at this time for one reason or another. Price had nothing to do with the choice.

[Booga]

Originally Posted by der passant

I disagree that the iPod Touch competes with the iPhone. As soon as you are out of wifi range its just an iPod. It can't do anything.

Now if edge service was built in it would give the iPhone a run for its money. Image if edge gave you unlimited wifi for $20 a month. Would you have purchased an iPhone. I'm not sure I would have.

I'm not sure about this. EDGE is much slower than wi-fi, and the Touch is not exactly a speed demon as it is. I find it incredibly useful in hotels, coffee shops, airports, work, home, etc. Even some rest areas on turnpikes now have wifi. I don't think I'd pay $20/mo for it even if my current touch had it built-in.

And even without wifi, the screen and UI are vastly nicer than the tiny little iPods. You still have world clocks and timers/alarms. You still can review things cached while you were online (including Google Maps directions if you paged through them all once while online and don't quit the app).

[der passant]

Originally Posted by Booga

I'm not sure about this. EDGE is much slower than wi-fi, and the Touch is not exactly a speed demon as it is. I find it incredibly useful in hotels, coffee shops, airports, work, home, etc. Even some rest areas on turnpikes now have wifi. I don't think I'd pay $20/mo for it even if my current touch had it built-in.

And even without wifi, the screen and UI are vastly nicer than the tiny little iPods. You still have world clocks and timers/alarms. You still can review things cached while you were online (including Google Maps directions if you paged through them all once while online and don't quit the app).

Yes, Edge is slow. But having used my iPhone for a while I have to say that having internet connectivity and email access anywhere is, for me, the big selling point. Oh the iPhone is a good phone but the PDA related stuff is what I use it for most. YMMV

[GQB]

"Without the iPod touch, Apple may have sold as many as 4 million iPhones in the last quarter alone"

That's nonsense. That implies that every touch buyer would have bought an iPhone if the touch hadn't been available.
I bought the touch because I couldn't attach my corporate number.
Others bought the touch because the phone wasn't offered in their geo.
Others because they objected to the required carrier or plan.

Now you can argue that the 3 issues about were addressable by Apple and/or their carrier(s), but I think its more a matter of a conscious decision to balance potential markets. Phone vs wifi device. Cannibalize is a bit to pejorative a term here.

[jouster]

Originally Posted by zanshin

Given that the Touch costs significantly less and now does just about everything I want from a mobile media device, I have no iPhone envy at all. Email is more useful to me than yakking away costly minutes on a cell phone that has far less connectivity than wireless internet access provides me.

Well, the iPhone also provides wireless internet access, so I don't really see your point.

[jouster]

Originally Posted by solipsism

While this is true, it's even truer* that he iPhone has cannibalized nearly 4M iPod sales. I now have one device where before I had two, and I don't know anyone who hasn't done this.


* This isn't fact, but an opinion based on my observation.

When you had two devices, only one of them was sold to you by Apple. That's still the case. Where's the loss?

[GQB]

Originally Posted by solipsism

While this is true, it's even truer* that he iPhone has cannibalized nearly 4M iPod sales. I now have one device where before I had two, and I don't know anyone who hasn't done this.


* This isn't fact, but an opinion based on my observation.

Given the BS kerfluffle that's been going on for the past week about iPod sales being down, and the resulting hit that's taken on stock, your point is worth noting. None of the figures I saw recognized that iPhone ARE also iPods, and should have been in some way added onto iPod sales numbers.

[GQB]

Originally Posted by Booga

I'm not sure about this. EDGE is much slower than wi-fi, and the Touch is not exactly a speed demon as it is.

I believe he was proposing EDGE as the stop-gap for when you're out of wi-fi range, not as a replacement for wi-fi.

[solipsism]

Originally Posted by jouster

When you had two devices, only one of them was sold to you by Apple. That's still the case. Where's the loss?

There is no loss of sale to Apple, but they are no longer selling me an item that is classified as an iPod. Therefore, the iPhone is cannibalizing iPod sales. Where did I mention that Apple is losing money?

[solipsism]

Originally Posted by GQB

Given the BS kerfluffle that's been going on for the past week about iPod sales being down, and the resulting hit that's taken on stock, your point is worth noting. None of the figures I saw recognized that iPhone ARE also iPods, and should have been in some way added onto iPod sales numbers.

For Apple's financial reports, it shouldn't be grouped together, but any analyst looking at unit sales should be grouping most of the iPhone sales in. I'm surprised that I haven't even read one analyst make mention of it.

[Booga]

Originally Posted by GQB

Given the BS kerfluffle that's been going on for the past week about iPod sales being down, and the resulting hit that's taken on stock, your point is worth noting. None of the figures I saw recognized that iPhone ARE also iPods, and should have been in some way added onto iPod sales numbers.

That last point is an interesting one. I'd be more likely to add the iPhone and the Touch to the Mac's sales figures, myself. The OSes are closer, the utility is closer, and the use cases are closer to the Mac than the iPod.

[solipsism]

Originally Posted by Booga

That last point is an interesting one. I'd be more likely to add the iPhone and the Touch to the Mac's sales figures, myself. The OSes are closer, the utility is closer, and the use cases are closer to the Mac than the iPod.

Would you also add the AppleTV to Mac sales, too, since the AppleTV OS is much closer to a Mac than the iPhone. What is being considered is how the devices are being used. The AppleTV, iPhone nor iPod Touch are replacing the personal computer as primary devices, regardless of the underlying OS.

[drjjones]

Iphone is sure handy driving to florida from pennsylvania. Got out of 2 traffic jams that were totally stopped for 2 hours in the 2 days i was on the road. Showed me where i was in 2 seconds the traffic in one, and the connecting road faster than my wife could get out the map. The map showed none of the tiny roads we needed , but the iphone showed them all down to the dirt roads. Found my way around the stoppage in unbelievable time and updated the traffic perfectly. I found it worth the money just to get out of the irritation. And i don't even travel much. Never leave home without it . lol . It ain't cheap . But then it makes high end items. Get used to it . It just killed Motorola yesterday. Nokia will be hurtn next . Tough luck phone companies. Here comes Apple and u gonna die. Wait till SDK package comes out and all the beans will be spilled out . Then the future will be spelled out . Secrets will be comin out soon. But i think they want the new chip new phone new package at once. February will be starting in 3 days . But i predict it will be the time Steve says "ship it " and not on a calendar yet . Not more then 31 days . Hopefully they are shipping for friday release but i highly doubt it . But I'm droolin already . Love 1.1.3 upgrade. Can't wait for all the games comin . Got the champagne chillin now.

[gar]

Originally Posted by AppleInsider

The increased support for the iPod touch may also be a calculated risk that future iPhone updates will negate any immediate hits to the current product's success. Needham predicts that Apple will release an upgraded, 3G-capable iPhone at the same price in the summer and will drop the price of the current model to $299 at the same time, also dumping current iPod touch prices to $199 and $299.

What a nonsense.
Apple is not a company which dumps prices to sell old inventory.

If the 3G iPhone will be released the current iPhone will not drop in price, it simple will be discontinued.
The new model might decrease in price, not the current model.

[tmedia1]

This does NOT ring true for me. I own a Touch, but it has not cannibalized an iPhone sale. I don't want an iPhone, I wanted a Touch. Apple only gained a sale in my case. This is lame logic! Typical analyst BS.

[ZagMac]

Originally Posted by Banalltv

There's more to it than that, it also allows Apple to make money from the technology in countries where the iPhone isn't available and It allows them to be in less of a hurry to negotiate deals for selling the iPhone in these countries.

Lots of people who want an iPhone will buy the Touch while they are waiting.

I'm years away from an iPhone purchase, if ever. at&t never gets my business again. And if T-Mobile ever carries an iPhone, I would need it to be a much smaller future generation model. I carry my phone everywhere, so size matters. While I'm thrilled Apple has entered the mobile business and look forward to all the great things they'll do in years to come, I don't consider the current iPhone an option, regardless of carrier.

So for me, the Touch is the only reasonable choice when next upgrade occurs. Bring on the price drop, increased capacity, plus hopefully a big surprise or 2 from Jobs that nobody is expecting it to have. Maybe stereo Bluetooth (not that there aren't people who expect that, but I haven't seen it rumored yet)?

[Joseph_xxl]

There are people who-
1 detest the idea of an AT+T contract
2 think the edge network makes dial up seem like light speed in comparison. These people would NEVER get a locked iphone BUT would be glad to plunk down the $$$ for an ipod touch.
I don’t see how Apple is cannibalizing iphone sales because consumers like me would not have bought one anyway….

[Clive At Five]

Originally Posted by Mr. H

Who cares if one Apple product cannibalises another?

That seems to be their excuse for not releasing an xMac. The market may be "niche" but it's a hell of a lot less "niche" than the MacPro.

Apple thinks they'll lose money if they don't pigeon-hole prosumers into the MacPro hole, but in reality, I think prosumers are buying new MacMinis every 3 years... which is still way cheaper than one MacPro every 9 years.

Anyway, Apple should take a hint from their "new mobile platform market," and release a "MacPro without the phone," so to speak. It'll bring Apple switchers and it'll shut annoyances like me up.

Originally Posted by tmedia1

This does NOT ring true for me. I own a Touch, but it has not cannibalized an iPhone sale. I don't want an iPhone, I wanted a Touch. Apple only gained a sale in my case. This is lame logic! Typical analyst BS.

Exactly. I wouldn't buy an iPhone, and I wouldn't buy a MacPro.

I want an iPhone without the phone, and a MacPro without the Pro.

If I was shopping for a iPod, I'd get the Touch - even though I'd "still have to carry around another device" (my RAZR) - or I wouldn't buy at all. If I was shopping for a Mac, I'd buy an xMac or I wouldn't buy at all... which is why I'm still using an 800MHz G4 iMac, and will probably be settling for a Mac Mini soon. It's been 6 years without a sale for Apple. Do you miss my money?

Point is, there's a distinction to be made between canabalization and the lack of being pigeon-holed. This iPhone, iTouch business is about not being pigeon-holed.

Unfortunately for my computer dilemma, it's not as easy as just "not buying a new iPod." My 4G iPod still works well enough. My iMac... practically has a beard.

-Clive

[solipsism]

Originally Posted by Joseph_xxl

There are people who-
1 detest the idea of an AT+T contract
2 think the edge network makes dial up seem like light speed in comparison. These people would NEVER get a locked iphone BUT would be glad to plunk down the $$$ for an ipod touch.
I don’t see how Apple is cannibalizing iphone sales because consumers like me would not have bought one anyway….

FUD much?
1) You don't need to have a contract to use an iPhone on AT&Ts network
2) EDGE is up to 7x faster than dial-up

[Clive At Five]

Originally Posted by solipsism

1) You don't need to have a contract to use an iPhone on AT&Ts network

I think there are some people who don't like the idea of unlocking an iPhone because of the potential risks. Remember the 1.1.1 bricking scare? Sure it all got sorted out but some people don't want to deal with it. They want their phone to "just work."

Luckily for my wife, her husband is enough of a nerd to help her troubleshoot anything, whether it be a mis-flashed iPhone, or her (yeuuk) Windows Vista PC. Don't worry guys, she wants to switch. She wanted a laptop, though, and a MacBook was a little out-of-budget for the time being.

-Clive

[solipsism]

Originally Posted by Clive At Five

I think there are some people who don't like the idea of unlocking an iPhone because of the potential risks.

I am talking about unlocking the phone. I'm talking about AT&Ts Go Plan, or whatever their month to month, no contract plan is called.

[rifleman69]

Apple only cannibalizes iPhone sales if the customers are willing to stick with AT&T for their cell phone service. Many, including myself and my wife, won't touch an iPhone until the AT&T exclusive agreement is done.

That's why we went for the iPod Touch, didn't need a phone to go with the iPod.

[CREB]

My son works for AT&T and tells me that it is the hoop-jumping and contractual obligations that stifle iPhone sales. Business customers (recently added iPhone category) are required to pay an additional $25/line for absolutely no additional service benefits; existing customers are obligated to append two-years to their current plan before being free from a plan; too much fine print between AT&T's contract and Apple's.

[Dorotea]

Originally Posted by rifleman69

Apple only cannibalizes iPhone sales if the customers are willing to stick with AT&T for their cell phone service. Many, including myself and my wife, won't touch an iPhone until the AT&T exclusive agreement is done.

That's why we went for the iPod Touch, didn't need a phone to go with the iPod.

I bought an iPod Touch and find that I am much more certain that I will purchase an iPhone when my contract runs out with Verizon. I would like all of my cool wi-fi apps to work even when there is no wi-fi. That of course means I need the iPhone.

So I think there is a certain population who have bought the iPod touch and now want the iPhone.

[zanshin]

Originally Posted by zanshin
Given that the Touch costs significantly less and now does just about everything I want from a mobile media device, I have no iPhone envy at all. Email is more useful to me than yakking away costly minutes on a cell phone that has far less connectivity than wireless internet access provides me.

Originally Posted by jouster

Well, the iPhone also provides wireless internet access, so I don't really see your point.

This should provide clarity about why the Touch costs less for me to use and therefore I like it better than an iPhone: The Touch does NOT require an expensive AT&T contract to activate and use with wireless internet. Without activation and an AT&T contract, the iPhone isn't even an MP3 player, let alone usable as a wireless internet connection device. Therefore, it has no value to ME because AT&T doesn't provide adequate coverage in my metro area -- I had to cancel Cingular and go to Verizon because others could use cell phones inside my house on Sprint, T-Mobile and Verizon, and I couldn't with AT&T.

When I write about what "I want from a mobile media device," I'm speaking strictly about my personal user perspective, not trying to cover the entire market's experiences.

I hope my point is sufficiently clear now.