Apple Seeks To Ignite Mature iPod Market

By Amy Gilroy -- TWICE, 9/17/2007

CUPERTINO, CALIF. — Apple's iPod line update will stimulate Christmas traffic, encourage replacement sales in a mature market and test whether music-playing cellphones such as the iPhone will eventually dominate MP3 player sales, retailers and analysts told TWICE.

The new iPod Touch — an iPod-only version of the iPhone with motion user interface (UI) — will excite the marketplace and the addition of video to the small-profile Nano could make it a key Christmas seller, some retailers said. "We anticipate a very big holiday season with Apple," said J&R merchandise manager Steve Giblin.

R.C. Willey Home Furnishings buyer Adam Davis said he believes the line will "spark some business and drive some people into the store."

Michael Goodman, Yankee Group digital entertainment director, contended the new iPods could be a bellwether for trends in the convergence of MP3 players and cellphones. Apple dropped the 4GB iPhone; slashed the 8GB iPhone price by $200, to $399; and gave the 8GB iPhone the same $399 price as the new 16GB iPod Touch, which uses the same motion UI.

The Touch, and now the iPhone, also use Wi-Fi to download protected music from a specially configured iTunes site.

"It will be a great test of consumers. Which is more relevant to them, an iPhone or iPod Touch now that they are the same price?" Goodman asked. "The next six to 12 months will be telling. Is the voice capability of the iPhone important enough to pay the additional $60 per month [in service fees]?"

In addition, the iPod Touch is being termed a mini handheld computer because it offers such functions as desktop-like Wi-Fi Web browsing (via Safari), built-in Google and Yahoo searches, as well as YouTube access over Wi-Fi.

"It absolutely is a computer that happens to run a music-playing program they've called iPod. But Apple has already started to show they can put just about anything on it," said Ross Rubin, industry analysis director at The NPD Group. "On the iPhone, they've put mapping utilities like clocks and weather programs. They could do any productivity applications down the road. They could do email, GPS navigation."

For now, retailers hope Apple will send Christmas cash registers ringing.

"About 75 million consumers own portable music devices. We're easily two-thirds or more penetrated. If you think about where your growth is going to come from, it's from consumers replacing their existing player either because it died or there's a newer cooler model," said Goodman, claiming the new Apple line re-established the cool factor.

The Touch uses a touch-sensitive 3.5-inch widescreen display similar to the iPhone, which swerves easily between landscape and portrait mode and responds to the touch of a finger. It offers Wi-Fi over-the-air downloading of music when used with a new iTunes Wi-Fi Music Store, available in September. In a planned arrangement with Starbucks, the iPod Touch and iPhone will be instantly recognized by Wi-Fi hot spots at participating Starbucks locations.

The iPod Touch is 8mm thin and ships this month at $299 for an 8GB model and $399 for the 16GB version. The new Nano has a 2-inch 320 by 240 screen, ships with three games, and is priced at $149 for a 4GB model and $199 for an 8GB model.

The traditional iPod, now called the iPod Classic, becomes available in a 160GB version at $349 or an 80GB model at $249. Both have a new all-metal case and built-in games with additional games to be available for purchase from iTunes.

The announcement that Apple would cut the 8GB iPhone price to $399 less than three months after launching it set off a firestorm of criticism from early adopters who had paid the full $599. In a rare apology, Jobs announced he would offer current iPhone owners a $100 Apple store credit.

Also last week, Apple said it sold a million iPhones in the 74 days since its launch and noted that it took almost two years to sell that many iPods. The news effectively quashed rumors that the new price cut was due to slower-than-expected sales.

Jupiter Research VP Michael Gartenberg called the 1 million milestone "an unqualified success. With the bulk of [iPhones] selling at $599, it's incredible, particularly in the U.S., where most consumers have been taught the aggregate value of a phone is zero dollars."