Needham says Apple letting iPod touch cannibalize iPhone sales

Posted:
in iPod + iTunes + AppleTV edited January 2014
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.
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Comments

  • Reply 1 of 52
    mr. hmr. h Posts: 4,728member
    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?
  • Reply 2 of 52
    zanshinzanshin Posts: 350member
    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.
  • Reply 3 of 52
    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.
  • Reply 4 of 52
    rdas7rdas7 Posts: 32member
    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.
  • Reply 5 of 52
    parkyparky Posts: 383member
    Quote:
    Originally Posted by rdas7 View Post


    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.
  • Reply 6 of 52
    solipsismsolipsism Posts: 25,726member
    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.
  • Reply 7 of 52
    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.
  • Reply 8 of 52
    wizard69wizard69 Posts: 12,828member
    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
  • Reply 9 of 52
    boogabooga Posts: 1,077member
    Quote:

    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.
  • Reply 10 of 52
    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.
  • Reply 11 of 52
    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.
  • Reply 12 of 52
    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.
  • Reply 13 of 52
    pmjoepmjoe Posts: 565member
    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.
  • Reply 14 of 52
    tundraboytundraboy Posts: 1,618member
    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.
  • Reply 15 of 52
    Quote:
    Originally Posted by AppleInsider View Post


    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.
  • Reply 16 of 52
    boogabooga Posts: 1,077member
    Quote:
    Originally Posted by der passant View Post


    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).
  • Reply 17 of 52
    Quote:
    Originally Posted by Booga View Post


    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
  • Reply 18 of 52
    gqbgqb Posts: 1,934member
    "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.
  • Reply 19 of 52
    Quote:
    Originally Posted by zanshin View Post


    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.
  • Reply 20 of 52
    Quote:
    Originally Posted by solipsism View Post


    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?
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