Goodbye iPod, hello iPhone
Apple passed an important milestone last quarter that nobody on Wall Street seems to have noticed: the iPod, once Apple's (AAPL) No. 1 source of revenue, fell into third place after the Mac (No. 1) and the iPhone (No. 2).
Think of Apple's business model — as Steve Jobs often does — as a three-legged stool: Mac, iPod, iPhone. As recently as 2006, the iPod leg accounted for 55.5% of Apple's revenue. By last quarter, its share had shrunk to less than 18%.
But this is a good thing, argues Bullish Cross' Andy Zaky, a day trader and occasional blogger whose estimates of Apple's earnings regularly beat — by a long shot — the estimates published by professional analysts.
"Many Apple critics have argued that Apple would essentially fall off the earth because at some point in time the iPod's growth would collapse," says Zaky. "The second part is true. The iPod growth rate has in fact fallen off a cliff as Apple posted its first yearly drop in iPod sales ever in Q3."
"However," he adds, "Apple is still firing on all cylinders thanks to the explosive growth of the iPhone."
To make his point, Zaky has prepared three charts that pretty much say it all.
The first shows in percentage terms how much the iPod has contributed to Apple's revenue stream since 2006 Q1. The spikes represent holiday sales seasons, when iPods are popular gifts, but the downward trend is clear.
The second chart shows the rapid growth of iPhone revenue as reported quarterly using generally accepted accounting principles (GAAP). This caveat is necessary because Apple spreads revenue from iPhone sales over the life of a 2-year contract. If you use non-GAAP numbers, revenue from the iPhone last quarter was considerably higher: $2.9 billion, according to Apple CFO Peter Oppenheimer.
Zaky's third chart puts it all together. It shows the relative height of the three legs in terms of their contribution to Apple's quarterly revenue. As you can see, the iPhone passed the iPod for the first time in 2009 Q3. The Mac, however, is still the largest and most important leg of Apple's three-legged stool.
Zaky predicted all this back in January in a long post that warned (incorrectly, as it turns out) of the "downfall of Apple," in part because the iPhone appeared to be cannibalizing iPod sales.
"The Phone itself has acted as a destructive double-edged sword regarding the appearance of Apple's financial health. On the one hand, the handset market is significantly larger than that of the MP3 market. And so it makes a whole lot of sense for Apple to have entered that market… On the other hand, it would be incredibly naive for one to believe that iPhone sales aren't cannibalizing iPod sales to some degree. While not everyone who is in the market for an iPhone is in the market for an MP3 player, iPhone purchasers who are in both markets have little need to own both an iPod and an iPhone.
"The main problem with the iPhone cannibalizing iPod sales is that it makes iPod unit sales growth appear significantly weaker than it actually is. The iPhone is basically an iPod with a phone. One who decides to buy an iPhone over an iPod touch is essentially buying an iPod. Yet, analysts, traders and the media don't portray it that way. Instead, the financial community tends to view any apparent weakness in iPod unit sales growth as being attributed exclusively to either market saturation or weakness in the consumer.
"Yet, if one were to combine iPod and iPhone sales, he or she would get a drastically different picture regarding iPod unit growth…" (link)
MonkeyBoyBalmer,
I am using Windows 7 for months now, it is clean and fast. No need to pay for overpriced Macs which have even lesser usability (need ask Steve's permission if you need to do anything beyond usual stuff)
True, Ipods are really taking a hit on the market. However, if one looks at the graphs, all three components (iphone, mac and ipod) are making a considerable gain for apple.
Well fashions change and Microsoft’s new OS sounds like it is actually innovative.
Posted By Tim, San Diego, CA: August 5, 2009 9:09 PM
M$ innovations? Like the Zooone? XP, Vista, Windows7? MSN Music Store copying iTunes. Now they're going to copy Apple again with MS retail stores with "Guru" bars? You can crawl back under your rock and continue sipping the M$ kool-aid.
well, I'm probably will not get an iPhone yet, maybe later after I know which service will be my carrier. My 2 ipod touch my kids use for school and backyard zoo games besides that I do not know which phone I will get pre or what…
John Ho said:
"If your carrier cannot run the iPhone, that means your carrier is using a non-standard phone network. That means your carrier is requiring you to change phones, not that someone else is requiring you to change providers. For example, Verizon requires you to use phones that have been specifically made for their network. That is their crazy requirement. Blaming Apple for not making a whole second model of iPhone just for Verizon is asinine. Blame Verizon for building out a non-standard network. Blame yourself for buying a contract on a non-standard network that can’t run 99% of the world’s phones."
Verzion's network uses CDMA technology, the original digital cell phone technology. ATT and the iPhone use GSM which came later as it was Europe's answer to CDMA since they did not want to pay the royalties. So by your logic we should be blaming Apple for going with a non-standard technology since CDMA was the first standard.
There was supposed to be another new "pillar of revenue": the App store.
Has everyone noticed how Apple always talk about the squizillions of Apps that have been downloaded from the App store, but very seldom talk about how much revenue they are making from that?
Consider that Apple get one third of the revenue from every App that is downloaded. So one third of a squizillion is a very large number. At least a grizzilion.
Where is that revenue?
The answer is, of course, that the vast majority of apps downloaded are free apps. Hence no revenue at all is generated. Now why are the vast majority of apps downloaded free apps?
Because it is almost impossible to make a useful app for the iphone. the SDK (software development kit) is squarely aimed at games and fart jokes. If you want to do something useful, Apple start squealing and convulsing and feeling threatened, and they shut you down.
I bought the iPhone, then the second generation 3G. As it is now I will not buy the 3gs. Mostly because I wish to get off of the "upgrade lazy susan'. I have not even completed my first two year contract yet and we have already had 2 additional hardware upgrades to a phone that will cost me about 3 grand. I'm mad because of that and the fact the iPod Touch can do all the iPhone can except the phone part with no monthly fees. In my region the AT&T signal sucks and in my world so does the iPhone as a "phone". I am still loyal to apple products, however a little more cautious. Bottom line……….. If Apple would have got the deal on with Verizon I would not even be thinking this. Everyone knows that Verizon has the best US Signal to date, so for me phone is with Verizon, iPod touch here I come when my contract runs out.
Clearly John Ho is ho'ing for Apple. Which came first to the cellphone market Verizon or Apple? Remember that Apple went to Verizon with the iPhone first. They couldn't come to terms so Apple went to AT&T.
I have wireless at home, at work, at the gym, at parents, in laws, libraries and school. My I pod touch now acts as as a phone through a skype app, free texting app. So your comment about getting i touch over an iphone and simply writing off the i touch as an i pod doesn't seem accurate in my situation.
Perhaps it's only a matter of time until the I touch is supplied to carry a 3g signal. And then you will be writing an article how the i touch has cannibalized i phone sales.
Either way apple keeps making great products and the consumer continues to wait patiently and snatches them up as soon as they hit the market.
So what was once a 3-legged stool is becoming a 2-legged stool. And while the iPhone is a unique and innovative product the same can't be said for the Mac. I think for a lot of people the Mac has been somewhat of a fashion statement. Well fashions change and Microsoft's new OS sounds like it is actually innovative. So we might now be talking about a 1-legged stool.
> Will we ever see a decrease [in
> carrier charges] to make the
> iPhone affordable for a larger
> market.
My monthly iPhone bill is less than what I used to pay with a candy bar phone because even though there is $30 added for Internet data, the data connection enables you to replace many calls with a text message, email, looking something up on a map, or whatever else. And there are very cheap ways to make Wi-Fi calls with an iPhone such as Skype that you don't have with a feature phone, so I don't pay cell carrier long distance at all anymore. So although on paper it looked like my bill would go up, in practice it has gone down. I added data, but removed a big chunk of calls and all long distance charges.
But if the monthly carrier charges are still too much, then an iPod touch is a surprisingly good alternative. You don't have the cell phone but you do have a Wi-Fi phone, so you can run Skype at Starbucks. The iPod touch is only $229 and no monthly charges. A few months of Skype calling might make it pay for itself as a candy bar phone accessory. The iPod touch is really the answer for someone who balks at the 2 year contract of the iPhone.
> I’m still planning to buy my
> first iPod.
It's December for the iPod right now, so at this point you should probably just switch over to planning to buy an iPod touch or iPhone. I wouldn't pay for a click wheel at this point, not when iPod touch is $229 and is 90%+ of an iPhone.
> I would have bought an iPhone
> years ago if it didn’t require me
> changing service providers.
The iPhone does not require you to change service providers. iPhone is a standard quad-band GSM phone, and it runs on over 100 carriers worldwide. I sold my original iPhone to a guy in Italy. There are millions of iPhones running in China right now even though it has not officially launched there.
If your carrier cannot run the iPhone, that means your carrier is using a non-standard phone network. That means your carrier is requiring you to change phones, not that someone else is requiring you to change providers. For example, Verizon requires you to use phones that have been specifically made for their network. That is their crazy requirement. Blaming Apple for not making a whole second model of iPhone just for Verizon is asinine. Blame Verizon for building out a non-standard network. Blame yourself for buying a contract on a non-standard network that can't run 99% of the world's phones.
So this is definitively not Apple's fault. If you want to run standard phones, get a standard phone carrier. Your destiny is in your own hands.
> Going forward the iPhone platform
> will continue to outgrow Macs.
This is how it should be. The Mac is for production, the iPhone/iPod is for consumption. There have always been more books than typewriters, more CD players than music studios, more TVs than camcorders, and there should be more iPhones than Macs. Everybody needs something like the iPhone, and then a subset of iPhone users also need a Mac because they want to make something, like an iPhone app or a song or movie.
> I still have and use my iPod but
> if I am carring my iPhone, then
> its not needed.
That is unusual. Most people have their phone with them everywhere. In my case, in 2007 I replaced an elderly iPod with a new iPhone that I use about 75% of the time as an iPod. For me, the iPhone was definitely an iPod with built-in phone and computer. That is classic cannibalization of iPod by iPhone.
> Why you feel the need to create
> a bogus comparison between the
> iPod and iPhone is beyond me.
> It’s incoherent.
The comparison may or may not be bogus, but the author did not create it. The comparison between iPod and iPhone sales comes from the plain fact that they are sold in different markets. The iPod is literally an "MP3 player" (anachronistic to say MP3 but that is what the market is called by business criminals) and the iPhone is literally a "smartphone". So when someone who has been buying iPods for years stops buying iPods and starts buying iPhones, that is unquestionably good for Apple (or at least not bad) but it can be described as "Apple losing market share in MP3 players" period.
If you're not a fan of accounting (like me) then just stay out of it. Telling accountants their comparisons are incoherent only encourages them.
> Android
Android is not equivalent to iPhone OS. Android is equivalent to OS X. It's a layer lower.
> What is your rational to not
> cover myTouch?
iPhone sells more units per year than myTouch will sell all year. Expect news coverage to reflect that. Also, myTouch has almost no mindshare and no apps. There are hundreds of phones that are interchangeable with myTouch.
"Andy Zaky, a day trader and occasional blogger…"
Really? You are quoting a day-trader and sometimes blogger? What credibility does this guy have, just 'cuz he writes a blog? Why not ask the guy at the local car wash, because he owns an iPhone? If all it takes is to be an occasional blogger and day-trader, than you can find anyone – anywhere who has an opinion you seek. That's like movie studios finding some hack who loves their movie and using them for quotes in their advertising. I am sure some schlock liked Ishtar, but that doesn't mean it was a great movie and they should be listened to. Next time find someone with actual credibility, otherwise if just contact me and I'll give you a quote… my thoughts are just as worthy as this doof.
Anyway, iPod sales declining are to be expected as the market is saturated and more are choosing to get an iPod touch instead of a traditional iPod. If they put a cam in the Nano and/or Classic that will help them continue to sell, otherwise – only putting a cam in the touch will kill them both.
But the genius of Apple (and Steve Jobs) is that they/he plans for the future like they did with the touch and iPhone. Now it seems they are planning a tablet which will add a new revenue stream and who knows what other genius products they have in the works for added revenue and sales. That is called good business and great leadership.
ex ped: I guess you haven't been following the work of guys like Zaky and Turley Muller. See for example Analyzing the Analysts Q3, Q2, Q1, Q4.
Hmm…, Zaky must have read my blog post from May… http://www.spidersapple.com/2009/05/ipod-vs-iphone-growth-potential.html
The iPhone is a wonderful piece of equipment, however I know of many people who don't use it because of the extra monthly charges for internet browsing, etc. Will we ever see a decrease to make the iPhone affordable for a larger market.
Seems these graphs ignore the introduction of a new iPhone in June. I imagine we will continue to see the growth of the iPhone. Apple needs to get more options for its providers and quit the exclusive contract with ATT. Turns a lot of consumers away. I would have bought an iPhone years ago if it didn't require me changing service providers.
It should also be pointed out that Apple has launched 4 BILLION+ revenue streams in the last 9 years (iphone, ipod, itunes store & retail) … anyone else? Hello? Hello?
The third bar graph is confusing. It would have been better to show all sales in a multi-colored single bar for each year. The trends would have been displayed more clearly.
Revenue from the iPhone platform hardware (iPhone + iPod Touch) has already overtaken Mac revenue when you use the non GAAP figures. Going forward the iPhone platform will continue to outgrow Macs. I cover this in more detail in my article
http://lowendmac.com/nash/09tn/iphone-takes-over.html
Good analysts state the in-depths from historical facts. Visionary sets the stage of what I would call as the staple of mobile electronics.
And the charts show something that no one has addressed: buyers move from isolating devices (iPods) towards communicating, connected devices (iPhones and Macs). The upward cash flow in iPods come from the one that does connect: the iPod touch.
The more persistent the manner of connection, the more popular the device. iPods only connect to computers by cables; the iPhone and iPod touch connect by 3G (iPhone), WiFi, and direct connection. If cameras appear in the new small iPods, I expect them to also support WiFi, at least to connect to photo sharing sites.
However, connectivity is not the whole story. iPhones connect people to other people (all phones do this and the cell phone market is robust); Amazon's Kindle only connects to their store so they can get your money quicker and while the device itself is not bad for reading ebooks, it is really a device to make buying ebooks easy.
Good stuff, but I would not have used percentages, as it implies that iPod revenue is declining, when in fact, it's the percentage of Apple's total revenue that is declining. Using percentages makes it a zero-sum game, increasing iPhone percentage leads to declining iPod percentage. The greater takeaway one should have is that Apple revenue is growing, while iPod sales have stagnated.
I, personally prefer to look at the real quarterly sales picture, which is the non-GAAP one. Do you realize that Apple sold $42.3B in the last 12 months, not the $34.6B? Did you know that Apple made $8.3B in Net Income in the last 12 months, not the $5.2B as reported under GAAP? There's such a huge difference between GAAP and non-GAAP figures, that I think both should be reported equally.
Charts showing Non-GAAP growth in sales and Net Income would be far more interesting.
ex ped: Fair enough.
Hmmm, interesting article but I think the author makes the same mistake that EVERY article writer has been making.
NO product GROWS in sales forever. And how you measure something is critical. Show Apple GROWTH and you might see a chart that goes from heavy growth to less growth. Show the same chart as cash received and you see an upward trend. Show that chart as a portion of world sales of technology and you might even see negative growth.
iPods are not going away any time soon. Is the growth dropping,,,,, yes. Have the units sold stabilized….. yes. As people who want an mp3 player have one, you are looking at replacement and new person sales rather than sales to "fill the void". But I think that 40 million iPods a year, each and every year is a good sustainable market and if you add in iPhones as iPods (cause….. well…… they are 
) then you see growth.
I still have and use my iPod but if I am carring my iPhone, then its not needed. If I am not carrying my iPhone (sports, picnic, sailing, etc) I am carrying my iPod. Period.
Just a thought.
en
The title "Goodbye iPod, hello iPhone" and your claim that "the iPod, once Apple's No. 1 source of revenue" is a tad misleading. The iPod was the largest revenue segment in 4 qtrs in the product's introduction in Dec 2001. That's 31 quarters. And 3 of those 4 qtrs were December quarters. It is a false comparison. The Mac has always been the company's bread and butter — obviously since the Mac has been larger than the iPod in 27 of those 31 quarters. Why you feel the need to create a bogus comparison between the iPod and iPhone is beyond me. It's incoherent. Also, you're quoting a guy (Zaky) who mouthed off about Apple EPS a few quarters ago and was proven so wrong that he disappeared for a couple of quarters.
Seeins as the iPod Touch and teh iPhone are both iPods technically, it makes sense. This September will likely show a bit more of a mix up of the iPod ranges (less so the nano, more so the Classic, and nano).
PED,
unrelated to above news. T-Mobile has released MyTouch Phone. I can't find any news on cnnmoney. I believe Android is serious business even if they tiny market share compared to iPhone. What is your rational to not cover myTouch?
ex ped: CNNMoney has a big roomful of writers. My job is to cover Apple. Someone else will cover myTouch. (Unless I can find a way to turn it into an iPhone story.)
Of course it is accurate to say that the iPod "revenue share" has shrunk to less than 18%.
HOWEVER! Since iPod revenues have not fallen significantly (if at all – sorry I do not have the numbers handy) – it would really be more accurate to say that iPhone and Mac revenues have GROWN as their share of Apple total total revenue.
Since the Mac is the core Apple business – we should hope that this would be the case.
Has anyone considered the fact that the price of an iPod has actually dropped over time? Today you get more GB for less cash than you did last year. That alone would account for some decreased revenue over prior years. Would be interesting to see the facts displayed in number of iPod units instead of revenues.