Apple Decides to Kill Remaining Market for iPod Touch, a Rant in Two Parts

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Part 1. Dan’s Rant.

I have long been a proponent and advocate of the iPod touch. Since it was first announced, I have owned and used each successive generation of the “iPhone without a phone” and currently have, and use, a 32GB current generation iPod touch. I love it. I love having tons of music loaded on it. I love using it as my point and shoot camera. I love having a device that does almost everything my iPhone 5 does in a slimmer, lighter package. And while I recognize that, as someone who has and uses an iPhone 5 AND an iPod touch, I am not the norm, I think there is a market for the iPod touch as either the entry-level iOS device for kids or as a pocketable iOS for someone using a phone running a different operating system. Today, however, Apple all-but-killed the remaining market for the device.

Yes, Apple dropped the $199 last generation iPod touch with a 3.5″ screen and replaced it with a new 16GB iPod Touch for $229. The new iPod Touch features a 4″ Retina display and is powered by the same dual-core A5 processor that is found in the iPod touch that was introduced last fall in 32 and 64GB capacities. But while the new iPod touch still has the front-facing FaceTime camera it loses the rear camera. It is an odd decision considering the fact that the iPod touch finally gained a usable camera last fall and, along with the loop hand strap that is also gone in the new touch- has been, at least in part, marketed as a point and shoot camera replacement.

Of all the device-positioning decisions Apple has made of late this is, to my mind, the dumbest yet. After all, at $199 the previous introductory iPod touch competed with the Kindle Fire HD. Sure it was smaller, but it came in at the same price-point. Now Apple’s least expensive iOS device is well past the psychological barrier of $199, AND it is less functional than ever. It makes no sense.

Know what would have made sense? A $149 iPod touch. Yes, had Apple gone down in price rather than up, then they could have gotten away with having the same last-generation size AND dropped the rear camera and still have a compelling case to make in favor of the iPod touch. Call me crazy but, were they to market the iPod touch at the $149 price-point, I even think they could have kept the smaller 3.5″ screen, dropped the rear camera AND kept the previous 8GB capacity. That device would clearly have been the entry-level iOS device. It would have undercut the pricing on many of the 7″ Android tablets with which it indirectly competes and, thanks to the barebones hardware, avoided cannibalizing pretty much any other Apple product. Instead, Apple introduced a touch with limited hardware and a higher price. In the process they just killed the market for the touch. That might not be an issue right away, but it will mean less kids given a touch as their first device and then growing into (or being locked into) the iOS ecosystem and more expensive devices.

Part 2. Mike’s Rant

The issue I have with the new iPod Touch goes back to the old saying ‘if you do what you’ve always done, you’ll get what you’ve always gotten’. In terms of the iPod, the market is clearly shrinking at the same time as every other mobile sector is expanding. Sales of iPods were down to ~12 million last quarter, down nearly 50% from the same period a few years ago.
There are two ways to look at the iPod market – either it is a niche boutique market best served with devices like the $300 5th gen iPod Touch which has a great camera and the same screen as the iPhone 5 … OR, it was a gateway for kids or those not looking for smartphones to get into the iOS ecosystem.
The distinction is very important because the newly introduced iPod Touch (and the existing 5th gen Touch) really only serves ONE of those markets … the boutique world. As a result, the new device will not expand the iPod market, won’t get more devices into the hands of middle class kids (who will be better served by an iPad Mini or Kindle Fire HD), and ultimately won’t do anything to help the iPod Touch increase its impact on Apple’s bottom line.
And the Bottom Line is important here – because while Apple feels pricing pressure everywhere, losing margin on recent iPads and iPhones, the iPod Touch remains one place Apple commands better than 50% margin. Therefore it is an area where Apple could most easily ‘buy market share’.
For example, let’s assume that the current $299 iPod Touch costs $150 in manufacturing and materials (50% margin). Dropping the price of that device to $229 would still offer Apple a 35% margin, which is pretty much in line with what they are seeing on the 16GB iPad Mini.
While it isn’t clear what the cost of the new iPod Touch is, we can make some estimates. If we take the $150 and use an assumed $35 for the 16GB of memory and $12.50 for the iSight camera, we come to a cost of $102.50. At a price of $229 that makes the margin $55% – even HIGHER than the existing iPod Touch!
So even if Apple dropped the price to $199 they would be at 48% profit, and could go all the way to $149 and still get more than 30% margin. Also, as noted much of the hardware of the 5th gen iPod Touch is more comparable to the iPhone than on any previous generation. So it is distinctly possible that Apple could lower the build costs by using a lower quality screen, or making any other of a series of cost-saving hardware choices. Then they could keep the margin higher while still dropping the price.
The reason to take that lower margin hit is to complete the decimation of the handheld game hardware market, which is already reeling as the Nintendo 3DS has stagnated and the PS Vita is an abysmal failure. Also, as Android devices continue the ‘race to the bottom’, this would give Apple the opportunity to flood the market with millions of these inexpensive little game and app and social media devices.
It is an opportunity lost by decisions made in a boardroom for all the wrong reasons.

Dan: And to add insult to injury, right below the product listing on the Apple Store is this not-so-subtle message advertising the non-crippled touch.

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Way to go, Apple… NOT.

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About the Author

Dan Cohen
Having a father who was heavily involved in early laser and fiber-optical research, Dan grew up surrounded by technology and gadgets. Dan’s father brought home one of the very first video games when he was young and Dan remembers seeing a “pre-release” touchtone phone. (When he asked his father what the “#” and “*” buttons were his dad said, “Some day, far in the future, we’ll have some use for them.”) Technology seemed to be in Dan’s blood but at some point he took a different path and ended up in the clergy. His passion for technology and gadgets never left him. Dan is married to Raina Goldberg who is also an avid user of Apple products. They live in New Jersey with their golden doodle Nava.

11 Comments on "Apple Decides to Kill Remaining Market for iPod Touch, a Rant in Two Parts"

  1. Hmmm.. while I agree with pretty much everything, as a dad who is looking to soon replace my daughter’s very aged 2nd gen iPod Touch, I was not even considering the last generation model at a $199 price point, this is infinitely more appealing at $30 more and I’ll likely end up getting her it at some point(hopefully after a price drop)…. So Im not sure it killed the market, though I do think Apple is missing out with the pricing games its playing. I guess they really believe that that $30 more in margin on the iPad Mini and this are not as big a barriers as would seem…

    • That’s really interesting to me and since you are the exact market I was thinking about… maybe it wasn’t such a dumb move. At the same time though, imagine THIS device at the same price or lower… that would have some pretty wide-spread appeal I suspect.
      My followup question to you. Why this iPod touch at $30 more and not, for example, a Kindle fire HD?

      • Well, me being who I am, we have an original Kindle Fire, another Android tablet, and new iPad too… The Apple products get substantially more use. ‘Portability’ is a pretty big key, and if we didn’t plan ahead to bring the bigger devices I end up losing my iPhone5 in the car to her over her playing on her old Touch (which is underpowered, cant be updated, and by now the battery doesn’t last very long).

        And I totally agree, I dont get them not going at a $150 price point if they can get there with say a high res 3.5 inch screen and 8GB with a little better chip and ram and no or a very cheap camera….I bet I can think of over 50 people that wont buy a Touch at their current price points, but would jump into the market down at that price.

        They need to start thinking they are a services company too. That’s a lot of people in their ‘hobby’ ecosystem by giving up some margin on their hardware…

    • I get what you are saying, but my thinking is that the cases of the iPad Mini and iPod Touch are entirely different. One is a fast moving market seemingly filled with people like me who were searching for the perfect small tablet and found it with the Mini (my only regret – if I knew how much I would love it I would have bought the 32GB LTE version).
      The iPod Touch is a *dying* market – again I note 50% decline in sales as the mobile world has been seeing 100%+ annual sales growth for smartphones and tablets.
      Each of my kids has bought their own iPod Touch in the past (3rd and 4th gen) with money they saved, so I am sensitive to that whole aspect of things. Kids who are ‘tweens’ these days are more engaged on social media than any prior generation has interacted with technology, so having low-end Nanos and Shuffles is meaningless (actually those are better for exercising, but anyway …), I just see that Apple could have created the ‘device for empowering non-smartphone tweens in social media’ with this device …

      • ‘Dying’ is only because everyone is letting it. Obviously this market is competing with tablets to lose some market share, but is it also shrinking because there is nothing in this market at a reasonable price point anymore… You can’t expect it to grow if you jack up the prices by $100 and fill the void with last generation devices that most people steer clear of(at still high prices)…

        I can’t believe Amazon or Google don’t see this and take a page out of Apple’s book and ‘re-invent’ this market. Make a COOL Android device for $100 and market the crap out of it to kids and tweens…. Since they dont seem to care about hardware margins I would think it would be a no brainer….

        This bigger screen trend that everyone has bought into must be selling devices now, but eventually the portability and price thing will come back around right….

  2. My son loves playing with apps on his Mom’s iPhone. So much so, I was halfway thinking of getting him his own iPhone. However, the problem with that is my cell bill is already large enough that I don’t need another Data charge and I don’t want to go to a capped data plan or a shared one at this point(unless I can get something bigger than 4 gig….10 would be good). So back at Christmas time I was thinking of getting him an iPod Touch until the new one came out back then and the price was crazy expensive when compared to other devices like tablets in the same category (Kindle Fire…etc). So he didn’t get it then or for his birthday. I’d get him a tablet, but he’d really like the size of the iPod touch as he could carry it everywhere. The 7 inch form factor is small, but he’d need to carry it in a bag or something and the iPod Touch would let him stuff it in his pocket and go. However, I am not paying tablet prices for what is essentially a phoneless iPhone. No way. Nuh uh. So he’ll just continue to use Mom’s phone whenever he can. 🙂

  3. You’re only thinking about Apple’s margins on retail sales when the devices are also sold wholesale to retailers that sell them for less. Walmart, for example, sells the 5th gen iPod touch at $20 off + bonus accessory pack. That’s the “Everyday low price” not sale price. And then there are refurbs, which Apple sells as low as $129 (8GB 4th gen – cheaper than Dan’s idea AND it has a rear camera). Yes, Apple’s retail margins on new devices are high, but they also provide breathing room for wholesale and refurb discounts.

    • Regardless of the absolute numbers, Apple maintains THE highest product profit margins in the consumer electronics industry. My point is that starting with a massive margin and cutting costs out, should give them pricing wiggle room – but they decided not to take it.

      • Except that they do use that wiggle room in wholesale and refurb pricing, which is my point. It’s not that they don’t take advantage of that room. They just use it elsewhere. Obviously you disagree with that use, and that would be a valid point for discussion, but it is incorrect to say it is not being used.

  4. I think there are a coupel of things that you are forgetting here: 1) There has a been a trend toward larger screens. Most people are probably happy to go to a 4″ screen – better for movies, game-playing, etc.. And 2) I suspect the market for 3.5″ screens is starting to dry up (screen manufactures wanting to make “fewer” models, etc.). That said the combo of 4″ screen and rear camera might have put the price higher than Apple wanted (or the margins too little for Apple’s liking) so they dropped the camera. But I really think the crux of the issue is a general move away from 3.5″ screens.

  5. loopyduck | May 30, 2013 at 2:29 pm |

    Ironically, this would be the ideal iPod touch for those wanting to switch to another platform without losing all the iOS apps they bought (assuming they didn’t want blown up versions on a tablet)…

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