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

Dan Cohen

11 years ago

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

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.

Way to go, Apple… NOT.