The race is over and iPod is now formally pushed aside and exists only as a niche player.
Apple just reported its Christmas quarter sales (21 million iPods) and therefore the total iPods sold in Calendar Year 2006 were 46 million units. Today Apple celebrates the profitability of the company, its strong share performance, the announcement of the iPhone and also, that iPod sales in calendar 2006 are up 45% over 2005. While iPod sales grew 286% the year before, still even as annual growth slows to barely 45%, this sounds good for anyone who imagines iPods rule the MP3 player market.
Except that at the same time the pocketable MP3 player market has expanded and now includes musicphones. Apple CEO told us so last week. And now it gets worrying. How is that musicphone market doing? While iPod sales growth is slowing, the growth in the much larger musicphone market exploded during 2006, growing at 243% !
Yes. A massive 309 million musicphones were sold in 2006 (you read it right, today musicphones outsell iPods at almost 7 to one!). And those who say "but they don't consume music on phones" - wrong. Several global studies now prove that the vast majority of musicphone owners listen to - and buy - music to - their phones. The game is totally, utterly, irreversably, permanently over. The iPod is a niche product today with rapidly diminishing market share. The mass market belongs to the phones. That is why last week Apple was forced into announcing the iPhone, inspite of not even owning the iPhone name.
We told you so
We blogged about the pending demise of iPods dominance from September 2005 - a year and a half ago - and we followed up on the story during 2006. I promised to return to this story one last time when Apple has released its Christmas quarterly data for 2006 to give one last angle to the story, and here I am.
Note on comments to this blog. We will take comments of course, but this time we will not tolerate the abuse. You have to read the full posting before replying. I will not accept any comments which necessitate a reply "like I said in the blog if you had bothered to read it". If you post comments without reading this blog, I will delete your comment without mercy. But if you refer to what I wrote about, rest assured, no matter how passionately you may disagree (or agree) with us, your comments will be kept and shown. Now lets move to the detail.
We started to report on the story of the iPod and its radical new rivals, the musicphones in October 2005 (2006 the year the iPod died). We then returned with about a dozen blogs during 2006 including the major blogs as Apple released its quarterly data in April (Nails into the coffin of the iPod) and July (Demise of a Darling). This turned out to be the most read story on our blogsite last year and each of our major blog entries on the topic echoed at dozens of other blogsites including many heavyweights of the industry joining into the discussion. Our blog attracted a lot of comments, many quite heated and the clear majority claiming us to be delusional, that the iPod could not be challenged by musicphones.
During 2006 the tone of those postings gradually mellowed, especially after Apple itself admitted that musicphones were a threat and that Apple was working on its own phone project.
Brief chronology. Apple introduced its iPod for the Christmas season 2001, a little over five years ago. While many said the music industry was in terminal decline (due to Napster and other file-sharing services), and that Apple's techie-oriented PC brand would not play in the portable music segment ruled by Sony, Apple forged ahead. Many analysts suggested Sony owned this space with its iconic Walkman brand. Sony was pushing its minidisk digital storage as the next evolution of portable music players.
Apple's iPod and its related iTunes music store were a radical innovation and brave move. Apple succeeded brilliantly. Alan and I are both big admirers of Apple and we made the iPod and iTunes one of the case studies of excellence in creating market space, in our book Communities Dominate Brands. We also pointed out that the success in the iPod resulted in greater sales - and profits - of its Macintosh personal computers line which was the majority of Apple's business back then, so it was not only a clever marketing ploy in reinventing an industry; it was a brilliant strategic move of increasing the appeal of the Mac and its profitability. In 2005 the iPod was perhaps the best case study of creating new market space.
So why the bru-ha-ha? In 2005 the iPod had experienced another record year of iPod sales. As Apple fiscal year ends in September, the previous four quarters had seen continuous sales growth from 4.5M to 5.3M to 6.1M to 6.4M units, leading to the Christmas period. We here at the Communities Dominate blogsite believed that Apple would also report record Christmas sales in 2005 - yet another consecutive quarter of sales growth (as it also did). A period of previous continuous growth, and all analysts - including us - agreed the immediate future looked also like continuous growth.
It is easy to forecast a continuing trend. It is most difficult to forecast a TURN in the trend, while the trend is still continuing strong. During the Autumn of 2005 iPod sales were going from strength to strength to strength. Consider that as the context, and then consider the foresight of our forecast. On October 7, 2005 in the blog entry "2006 the year the iPod died" we wrote:
"But 2006 will be the year when i-Pod is rather unceremoniously shifted into the dust bin of technology history. Why? Because in 2006 the mobile phone business will take over the MP3 music player market. The i-Pod will not die suddenly, and the fanatical music fans will hang onto their white earphones for years, but make no mistake, the signs are crystal-clear that the days of the i-Pod are numbered. And literally those numbers of days left are only in the hundreds, no longer in the thousands. During 2006 the shift will happen, and by the end of the year the majority of both MP3 players in use, and direct music sales to portables, will be to MP3 players integrated into mobile phones, rather than to stand-alone i-Pods."
Note in October 2005 we promised this: That the majority of MP3 players "in use" will be on musicphones, not iPods. While we were tracking the sales of musicphones during our blogs in 2006, our forecast went further than that. We promised that by end of 2006 the majority of users listening to MP3 players would be on musicphones. I have now indisputable evidence from multiple international reserach results that this has in fact happened.
Certainly a bold prediction when iPod was going from record quarter to record quarter to record quarter.
Today all agree - including Steve Jobs at Apple - that musicphones will dominate over stand-alone MP3 players, so today in January 2007 - that is not a radical thought. 18 months ago, few analysts were suggesting this would be dooming the growth which seemed so inherent to the appeal of the iPod. And I have not found anyone else, quoted as early as October 2005 who pinpointed that this change-over would happen as early as the year of 2006. The other mobile-centric pundits placed the iPod decline into the late parts of this decade at the earliest.
This forecast is even more relevant, if you recall that in October 2005 there was no LG Chocolate, no Nokia N-Series, no SonyEricsson Walkman series. The recently released Motorola Rokr was a consensus choice of a failure. And Samsung's impressive 5GB musicphone was sold only in South Korea. So the iPod was on an enormous growth kick and phone makers hadn't even started their race for real. Yet we made that forecast.
REALITY OF 2006
Now Apple has released its final numbers for the December quarter 2006. We know that the total shipped iPods in the Christmas quarter 2006 (Apple's first quarter as its fiscal year starts Oct 1) was 21 million iPods, a new record. Good for Apple.
Therefore with the three earlier 2006 quarter sales - official Apple numbers - were 8.5M, 8.1M and 8.7M units. Thus the total calendar year 2006 iPod sales were were 46 million units. We also know - please any Apple fans reading this, please take this source and consider - Apple's own CFO Oppenheimer admits iPods first ever fall in sales of two straight quarters in the first half of 2006. From a peak of December quarter sales in 2005 of 14M units, iPod sales fell to 8.5M and then further to 8.1M in the first two quarters of 2006. Then sales barely recovered up to 8.7M until now for the Christmas quarter Apple finally was able to break its old sales record and reach 21 million sales for the quarter. In total for the full year, from 2003 to 2004, iPod sales grew by 469%. From 2004 to 2005, iPod sales grew by 286%. But in 2006 iPod sales grew only 45%.
IS IT A SEASONAL DOWNTURN?
If at the same period the whole industry had seen a decline in "cyclical sales" ie after Christmas the sales numbers of MP3 players would be down and Apple had maintained market share in the first half of 2006, then this would not be any significant story. Typical business cycles. Big sales for Christmas, then slow sales in January. No big deal.
Except that the opposite is true. For the Christmas period 2005, SonyEricsson released its Walkman branded phones. Motorola revamped its line and incorporated MP3 players into its top line phones including the Razr V3. For the first quarter of 2006 LG released its iconic Chocolate, and Nokia released its first N-Series phones. As we reported in the spring of 2006 in our blog (Nails Into the Coffin of the iPod), while Apple iPod was suffering sales decline, ALL of the big five handset makers reported exceptionally strong growth specifically for their musicphones. SonyEricsson said its Walkman phones were driving its sales. During the Spring of 2006 Motorola announced it had shipped more of its Razr MP3 phones than all iPods shipped to date; while Nokia went one better saying it shipped more MP3 players in 2005 alone, than all iPods ever sold.
So while Apple pundits were suggesting a "seasonal decline", in reality the demand for portable/pocketable MP3 players was growing. But Apple had lost the plot. Consumer tastes had switched from standalone MP3 players like the iPod over to musicphones, and Apple was ignoring this dramatic new threat. The total pocketable MP3 player market grew 20% in just one quarter (ie over 200% annual growth rate when compounded), from Christmas quarter 2005 to January quarter 2006, while iPod sales nosedived over 40%. No cyclical downturn at all. Consumer tastes shifted, and the iPod was no longer in demand. People were flocking to the newer musicphones.
In the second quarter (ending June) 2006 the same was true. The world demand for pocketable MP3 players grew another 20% per quarter but Apple's iPod sales fell another 5%. Apple was clearly losing the war. It was not a controlled retreat, it was a bloodbath. We told you so in our last major blog on the iPods rapid loss of market share in our blog (Demise of a Darling)
By the summer of 2006 the writing was clearly on the wall and numerous major publications from the Wall Street Journal to Barrons to Business Week to the Economist all echoed that musicplayers were taking over from the iPod. Now analysts were joining in the chorus as well, including IMS Research, ABI, Ovum, Yankee Group, and IDC/Informa - the source Apple itself uses for its analysis. Microsoft's Bill Gates said the musicphones would doom the iPod. Also Apple itself admitted - Apple CFO Oppenheimer - that the musicphone was a viable rival to the iPod, in particular the Walkman Phones, and that Apple "was not standing still." And like we reported, each of the four global music majors, Universal Music, Warner Music, SonyBMG and EMI - came out with statements expressly on the iPod vs musicphone question, all very clearly stating that the future belonged to musicphones.
By the summer of 2006, of the experts quoted on musicphones vs iPods, not one said the iPod could sustain the musicphone onslaught. Some analysts said it would take years, others said the transition had already happened or was happening at that very moment. The tide had turned by the summer of 2006. The only ones left arguing, were Apple fans and iPod enthusiasts who behaved not unlike an ostrich, sticking its head in the sand and refusing to see the truth. After all last July, Apple's own CFO Oppenheimer said musicphones were in the same market as iPods.
I trust that today all Apple fans will accept that if Steve Jobs says at the launch of the iPhone the future of MP3 players belongs to musicphones, and that because of it the iPhone is Apple's most important new product launch, that we were right. Yes, musicphones and the iPod do serve the same market.
How did it turn out? Apple had 46 million units of iPod sales. Ovum has reported the total of musicphones shipped in 2006 were 309 million handsets (which is 32% of the total of almost a billion phones sold in 2006). Nokia alone said it sold over 70 million musicphones (yes for every two iPods sold worldwide, just one of its rivals, Nokia sold three musicphones). SonyEricsson has just reported its Walkman phones have accelerated its market share gains vs the other handset makers.
So from a peak global market share among pocketable MP3 players of about 80% in 2003-2004, in 2006 Apple's global market share is now less than 12.9%. (By less than, I have ignored the small independent MP3 players like Creative and the various Taiwanese, Chinese, Korean, etc stand-alone MP3 player makers. If you add their share, Apple's global market share is smaller still, well into the single digits) All through 2006 that market share plummetted. Today about one in seven pocketable MP3 players sold worldwide carries an Apple logo.
Can anyone spell "Game over" ? Yes, the iPod continues to sell well and deliver profits to Apple. But the iPod was mainstream once. It was virtually the "only game in town" only two years ago. Today the iPod is purely a niche product. Exactly like the Macintosh computers. Very smart, very cool, very easy to use, very exclusive and quite expensive. And sells only to a niche with market share in the single digits. This is the clear fate for the iPod. It won't go away. It just saw its market slip away. And we told you this in October 2005 (2006 when iPod died) when we wrote,
"When the statistics come in for 2006 - and the early forecasts of those start to trickle in around September and October of 2006, the big story will be the dramatic success of music players. You don't need to be surprised, you can recall that the Communities Dominate blogsite actually told you this a year earlier"
Daimler-Benz invented the modern automobile, with the petroleum based engine. They still make cars today, but Mercedes is definitely only a niche luxury brand. Yes, Mercedes can be profitable in its niche, but it was Ford and GM who used their mass production techniques, sold at lower costs, came and took over the global car market (with Volkswagen and Toyota obviously then following their lead), and it took Daimler a century to claw back into global sales relevance finally with the takeover of Chrysler.
The same has now happened to Apple. If they had made their move to musicphones in 2005, they would still own the MP3 player space. Even if they made their move in mid-2006, they could still have a major stake in the MP3 market. There were lots of analysts and experts urging Apple to make its move in the future, to launch their "iPhone" - the combined iPod and cellphone.
We were hoping to see the iPhone at least in the early months of 2006 when iPod finally was showing its weaknesses to the phones. But no, it wasn't until 2007, only a week ago, when Apple finally introduced its iPhone. Imagine if Steve Job's prediction holds, and they manage to sell 10 million iPhones (not an easy task). Ceteris paribus, ie if all other things hold the same, today, if Apple had 10 million iPhones also sold - in addition to the stand-alone iPods (I am assuming no cannibalization of iPod sales by the iPhone, which is obviously not going to be the case, but this is the absolute best case assumption), then the Apple iPod/iPhone combined market share would creep up from 12.9% to - wait for it - 15.3%. Yes, even if Apple's iPhone is incredibly successful, it can't restore the iPod's dominance. Even with the iPod, now in 2007, Apple is confined to remaining a niche player, selling in the low teens at best, single digits more likely.
BUT DO THEY LISTEN TO MUSIC
So then there were the armies of wishful thinkers - almost all iPod owners by the way - who said they could not see people listening to music on a phone, for a bewildering array of arguments and reasons. Fine. Earlier last year I had to resort to analysis, reasoning, and anecdotal evidence. But like I said back then, there will be actual surveys on this topic during 2006, as I knew the studies were already under way. We now have the facts. Now the matter is irrefutable. People do listen to music on phones.
In-Stat reports in August 2006 that 56% of owners of musicphones have downloaded music to their phones. Note not "listened to" but "downloaded" music. Certainly not all iPod owners download music from iTunes!! This is an amazing number. Nokia very similar numbers from October 2006 saying two out of three (67%) of musicphones are used to consume music. And Continental Research breaks it down - 23% of the phone owners worldwide have a musicphone in October 2006, and 15% of all owners of mobile phones, not owners of musicphones, listen to MP3 files on their phones (which is 65% of all musicphone owners). The most recent survey by Continental Research from the UK in November, of the most attractive 16-24 year age group shows the future. Of this group in Britain 47% own a musicphone, and 39% listen to music (ie 83% of the British youth who own a musicphone listen to music on them). Two thirds of these also own a stand-alone MP3 player, yet over 80% of the musicphone owners were either very satisfied or satisfied with their musicphone. This battle is so totally over by now.
The survey data is consistent, all report a majority of phone owners using their phones to listen to music. No survey has been released with any suggestion that people do not use these phones to listen to music
The argument "nobody listens to music on a phone" is totally proven to be untrue. If 15% of the global phone ownership listen to music on their phones (explicit finding of Continental Research above), then out of 2.7 billion people today, that is 405 million people - yes you read it right. 405 million people - ALREADY today (January 2007) listen to MP3 files on their phones. And yes, compared to the total installed base of iPods ever sold (about 88 million) that is 4.5 times bigger than all iPods ever sold. Remember I am not now talking about people who "own" a musicphone. I mean that is the number of people who "listen" to music on their phone.
And if we remember many iPods (especially Nanos) go to existing owners, then the musicphone lead is even bigger at probably 6 to 1. Now you can see why Apple had to announce its iPhone. These kinds of facts, with this kind of market share carnage, without an existing iPhone announcement from last week, would have demolished the value of Apple shares today.
WHERE IS THIS HAPPENING?
We also heard a lot of American readers write in and complain, that they did not see anyone doing this, how was this possible. Where was this happening. Those comments should now subside as several American carriers (mobile operators) have released their music services and several of the handset makers have now brought to American shores the same musicphones we've seen in Asia and Europe for some time already such as the SonyEricsson Walkman that is so popular among musicphones.
But on the point itself. As we've reported already here at this blogsite the world's leading music markets for mobile are South Korea, Japan and Sweden - the three markets where this innovation first took off.
Japan is less than half the size of America by population and GDP. In Japan alone, MP3 files sold to musicphones amount to over half of what iTunes sells globally (including in Japan). In Sweden the smallest carrier (mobile operator) sells more MP3 files than iTunes in Sweden. And in South Korea - where this industry was invented only in 2003 - by Spring of 2006 over 45% of all music sold in South Korea, is sold directly to phones. Note that in America where iTunes has existed twice as long, only about 10% of all music is sold to iTunes.
WHY IS THIS HAPPENING
Why? Many reasons why. First there is lazyness and convenience. Yes in a perfect world we'd all want the cool and functionally excellent iPod. But we don't carry our iPod everywhere - we do carry the phone everywhere as we've reported here, the attraction to cellphones has now been proven not only to be addictive (Catholic University of Leuwen) but as addictive as cigarette smoking (Queensland University of Australia). We've reported that 60% of all cellphone users take their phones physically to bed with them at night (BDDO study) - and 72% of us use the phone as our alarm clock (Nokia survey), meaning another 12% (mostly the older and less addicted users among us) place the phone on the nightstand next to our beds. Yes its that addictive, we do take our phones to the bathroom as I was quoted in Communications Week back in 2000.
Then there is youth-preference. No matter how much young people love their iPods, they love their cellphones more. Combine a good MP3 player - don't think Rokr, think SonyEricsson's Walkman phone - and enough storage ability - and yes, young people switch off the iPod and onto musicphones.
Which brings me to the removable storage. iPods have internal storage only. Any smartphone today has removable storage. Today 4 GB of removable is already available, many times the storage of low-end Nanos. And now you can switch series of music collections - both among your own tastes (if you have a large collection) - or among your friends, simply by snapping in a different memory module. Most musicphones allow hot-swapping this without removing the battery, meaning changing gigabyte musicfiles is as easy as changing CDs on a CD player. The phone is superior at its storage options. The phone is Better.
Then there is the sheer range of music experiences you can have on your phone. What do I mean. Lets start with the iPod and see what all kinds of music experiences can we have on it. We can transfer songs to our iPod. We can buy songs (cumbersomely via a PC and credit card) from the iTunes store, and store on the phone. We can listen to to songs. And podcasts. And we can view music videos (and other video content).
Phone? Easy. We can transfer songs to our musicphone - but typically there are several more connectivity options from USB cable; to wireless like infrared, Bluetooth and WiFi; to removable storage memory card, to allow us to do this. We can buy songs like for an iPod, but much more conveniently - not all iPod owners have a Mac or PC, think kids for example - on a phone we can buy songs as direct OTA (Over The Air) downloads to the phone. It is more convenient, not requiring the transfer from a PC. But better yet, we can also buy whole albums via memory card (like Robbie Williams pioneered). And even better - most kids don't have credit cards - we can make the payment direct on the phone. Best of all, we can also receive music for free in various advertisement supported services that are now launching. Transfering music to a phone is much more versatile than an iPod.
We can listen to podcasts on phones obviously, and we can view music videos on our phones (vs Video iPod), except that most smartphones have superior colour screens to basic iPods (except for the video iPods) so in many cases music videos play better on a phone than most older iPods or basic models like the Nano.
But this is where the musicphone totally trumps the iPod. While there is nothing the iPod can do that we can't do on a phone; there are dozens of things we can do with music on a phone that can't be done on an iPod.
Starting with ringing tones. You think it is silly? Yet Ringing Tones worldwide account for more than five times the revenues than all of iTunes worldwide - yes ringing tones deliver over 7 billion dollars of revenues globally. No matter how silly it is, people are doing it. They are expressing their individuality through their music, playing it to random people near them, in a bus, at the office, in Starbucks, at school, etc to show off what is their music taste. In fact, during 2005, one ringing tone, the Crazy Frog, earned more worldwide than all iTunes sales of 2005 put together. That is how big ringing tones is as music. Don't dismiss this just because you are a snob and own a huge CD collection. Remember your parents when you were a teenager who complained about your tastes in music as not being "real music". They didn't understand heavy metal or rap or techno or punk or whatever. This has always been so, that younger generations embrace newer types of music, consumed often on "inferior" listening devices. But ringing tones are real, 14% of the global music industry revenues. And you can't do ringing tones on an iPod.
The phone allows us to consume "ringback tones" - waiting tones - which is a bit like music on hold. When you call me, I can play my fave music to you before I answer the phone. Can't do that on an iPod. Ringback tones - younger than the iPod and like many of these inventions, comes from South Korea - are worth two billion dollars worldwide, 800 million in China alone. Yes, again much bigger than all of iTunes worldwide.
Then we have welcoming tones. You visit my room in my virtual property - imagine visiting my island on Second Life or my room in Habbo Hotel. If you visit my room in Cyworld, the system can play a welcoming song for you (in my case, a theme from one of the James Bond movies, depending on my mood). A rage in South Korea, just now spreading to other virtual worlds in China, Taiwan and Japan. Can't do welcoming tunes on an iPod.
Latest innovation from India? Background music. While you speak on the phone with someone, you can have your music playing softly on the background - that both of you can hear. Again another way to consume - and share - music on a phone, not possible on an iPod.
Music video. Yes, now Apple offers music videos too. But music videos were introduced in Japan and South Korea four years ago for phones, and in England, the second biggest digital music store behind iTunes UK, is the music VIDEO downloads on their smallest cellular carrier, Three/Hutchison. Whole video broadcast channels like MTV are available on the phone - not as downloads, but as video streaming. Can't do live streaming on an iPod. Globally musicvideo sales to musicphones alone are bigger than all of iTunes sales.
Music-creation. But wait. The phone is not only a consumption device like the iPod. The phone is far superior. It is more like a pocket Mac. A pocket computer, fully capable in all kinds of creative applications. Want to compose a ringing tone? (don't argue that this is toy level of music, whole symphony concerts have been composed for this newest musical instrument by world respected symphony music composers) Was possible from the first smartphone - the Nokia Communicator, ten years ago, five years BEFORE the iPod.
Compose serious music? Japan introduced MIDI interfaces five years ago - meaning professional musicians you can use a phone to play synthesizer sounds, from the drums to guitar to piano to the violin, and you can't tell the difference to any other professional MIDI synthesizer say from a Korg, Moog or Yamaha. You cannot create new original music on an iPod. You can on a phone.
Make your own music video. Yes, it just gets worse. Just like the Bugles sang at the launch of MTV in 1982, "Video Killed the Radio Star" so too music video is killing the MP3 file. And you view music videos on an iPod yes, but you can't create music videos on an iPod. You can on your phone! In fact hundreds of bands have already used cameraphones to capture video for their music videos. The British dance label Ministry of Sound actually invites fans to submit videos for their latest hit ("Put your hands up for Detroit")
View live concerts? Robbie Williams multiplied hundredfold the audience of the premiere live rock concert in Berlin at the launch of his newest album. His concert was simulcast live on 3G phones in Europe. Yes you can view recorded videos and transfer them to an iPod, but you can't view live music on an iPod.
Then express your music? Dance. Yes you can dance while wearing your iPod. But you can't capture your dance moves with your iPod, nor can you share your dance moves with others via your iPod. You can with your cameraphone as thousands of clips on YouTube can attest. The British pop trio Sugababes even invites its fans to submit video of dance moves that the Sugababes will then perform in their stage act.
Then there is karaoke, one of the biggest value-add service categories of music on mobile phones in Japan, South Korea and many parts of asia. You can't do karaoke on an iPod, but you can on a phone.
And how about the dance tutor? Want to learn your dance moves to your fave song? Isn't available on an iPod. But since it was launched in South Korea, the virtual dance tutor is on the phone in many countries. Select your fave song, set the tempo, and a stick figure will guide you through the steps. As you learn your dance moves, you speed up the tempo. Rihanna the pop artist was one of the first western artists to adopt this idea. Can't do that on an iPod.
And I haven't even gotten to the really huge part of digital music - communities and social networking. The fan club? The youth/pop band Twins in Hong Kong (think Spice Girls) pioneered the full fan club experience on the phone. How about rating your fave bands and their songs and sharing that online (live), like on MySpace. While MySpace is making inroads to mobile, the Cyworld service from South Korea - on Helio's network in America - offers this on your phone. Forwarding music, viral marketing, chat, etc. You can't do community on an iPod, but 3.5 billion dollars worth of community services were already consumed on the phone last year - more money spent on communities on the phone than on the fixed wireline internet in fact. Can't do communities on an iPod.
The musicphone simply offers an unbeatable offering of how thoroughly you can enjoy music. In many of the cases above, if you have BOTH an iPod AND a Mac (or PC), you can construct that kind of work-around to get that enjoyment. But if you don't own a PC, and only have an iPod (or for example took your iPod with you when you visit your in-laws for the weekend) - you can't connect to the web alone on an iPod. You have to have a separate computer AND an internet connection to it. But the mobile phone is connected to the cellular network "all the time" (subject to local cellular network coverage obviously) so all of the above services work "always" on a phone, never necessitating owning a PC.
For simply listening to music, yes the iPod is best. But for music consumption and enjoyment to its fullest, the phone utterly dominates the iPod. Now you understand why the music experience on a phone is so rapidly gobbling up the market you thought belonged to the iPod
How about America?
We always talked about global numbers. Alan lives in the UK, I live in Hong Kong. Our clients are mostly global giants.
We were not prepared for the influx of hatemail from the Apple fanatics. We reported on the iPod numbers in the Autumn 2005, Spring 2006 and Summer 2006, reporting on the current status of the race between stand-alone MP3 players (primarily iPod) and the musicphones. Each of the iPod postings attracted huge amounts of angry replies from Apple/iPod fans ranging from the personal attacks "you're idiots" to the denial "can't happen here" to the conspiracy theorists "you are part of the anti-Apple mob".
The relevant point is, that while the iPod was launched in America in 2001, the musicphone was invented in South Korea in 2003 and spread first to Japan and Norway, and only during 2005 to much of the rest of Asia and Europe, and only in 2006 did music services really take off in America, and the advanced musicphones finally hit American shores. American readers of our blog were not witnessing the transition, for the simple reason that the phenomenon was only starting in America while it was in full swing in the rest of the world.
Therefore, if the iPod launched in America, and then spread to the rest of the world, and the musicphone launched in South Korea and came to America last, it makes sense, that the relative market share of iPod vs musicphone is greatest in favour of the iPod in America, and the most tilted in favour of the musicphone in South Korea. As it also is in real life. Note that Apple's own CFO reported on Apple international market shares in April of last year. Oppenheimer said that in America they had 78%, the next five best markets were Australia 58%, Japan 54%, Canada 45%, UK 40%, Germany 21% with the rest of the world in the teens and single digits.
Hello! Any mathematicians out there? USA accounts for 4.5% of the world's population. Apple CFO reports iPod penetration is 78% only in America, between 40% - 58% in four countries, 21% in one country, and of the remaining 200 countries in the world iPod market share is in single digits or teens, SURELY last Spring Apple's global market share could not be anywhere near 70% or 80%. So while the press was blindly aping the silly Apple propaganda in April, the reality of the investor conference and Apple CFO Oppenheimer's admission was that Apple's true global market share was 20% at best. A total reversal of the story, truth being exactly the opposite of what was being reported.
We told you so here. Few other analysts were picking up on this in April. But by July the truth was out, and this illusion was finally shattered. Obviously by the Autumn of 2006 all kinds of media, analysts and experts understand the real picture and reported it. And since the iPhone annoucement of last week, obviously now the matter is moot.
WHAT WILL HAPPEN IN THE US MARKET
So since the iPod and iTunes is so well entrenched in the USA, will at least the US market hold for the iPod. No of course not. I've proven to you in the above, by independent research on user behaviour, on global studies and surveys, and from dozens of examples, why a music experience is better on a phone.
I have not even mentioned my other analysis from earlier blogs about the phone advantages out of scale, replacement cycles, handset subsidies etc. You can go back and read those. This blog is long enough already, so let me be brief here.
For the American market, lets turn to the experts on the USA and see what they are saying specific to the US market.
The RIAA (Recording Industry Association of America) reports that all music sold to phones (including OTA downloads on all networks and ring tone sales) doubled in the first half of 2006. NPD Group reports in August that musicphone sales doubled in the first half of 2006 (remember this was at the time when iPod sales had declined by 47%) with 10% of all handsets sold in America being musicphones. NPD said there were 67 separate musicphone models sold in America as of July of 2006.
Instat reported in July that one third of musicphone owners in the USA were so happy with their musicphone that they intended to use their musicphone as their primary music device. IDC said in October said that even in the USA, OTA music downloads for mobile were catching up with iTunes, and for the second half of 2006, already half as many OTA downloads would go to musicphones as were sold in iTunes.
IDC - the research company quoted by Apple itself - said in June that in the USA the tipping point will happen in 2010 when more users will consume music on phones than on stand-alone MP3 players like the iPod. Yankee Group said in June that the tipping point would happen earlier, in 2009. So yes, the same trends hold in the USA as the rest of the world. Because America was last to get musicphones, and USA is the best market for iPods, it will take longest for the transition to happen in the USA, but it is inevitable that this will also happen there. The iPod cannot sustain its lead in the USA, its best market, to the end of this decade so who cares which year it happens.
AND THE BIG PICTURE FOR THE WORLD
Also every major analyst who has commented on the iPod vs musicphone battle has come on the side of musicphones during 2006. IDC (the company Apple uses) said in June that wireless music downloads will exceed online. IMS Research said in July that cellphones will replace iPod market. ABI Research said in August that music capable phones will exceed iPod sales. Portio Research came out on January 8 with their digital music report saying phones will "totally dominate" the market over standalone MP3 players.
IDC in its trends in the cellphone market report said: "We are seeing consumer's shift their aspirations from slim handsets to the world of mobile music." And they added "Mature markets are at a point where it is worthwhile for the carriers to launch these devices with strong marketing campaigns behind them, knowing that consumers are willing and ready to use their device as a music player as well as a phone " (IDC, 21 Oct, 2006). IDC's sister organization, Informa, put it like this: "There is no doubt that the market for mobile music is slowly becoming recognized as an alternative to the iPod." (Informa 26 Oct 2006). Apple's CFO Oppenheimer told you so in July. And now in January 2007 even Steve Jobs admits the future of music belongs to musicphones. But I have to point out, we were first, in September 2005 to say that this would happen in 2006. Nobody gets all predictions right, but we sure got this one right
We are no longer interested in this story. We reported it when it was radical news - the industry darling, and our fave technology which was growing quarter after quarter after quarter, and apparently no end in sight to this growth in 2005 - was about to die (ie to see its market share vanish). And that would happen the very next year. This was a big story in September 2005. It was a relevant story in 2006 as it happened. It has now happened, is only of historical relevance, and only the end-game remains. We honestly are not interested in this story anymore, as all the mainstream press and analysts now "get it" and are reporting it. Even Apple "got it" finally and reacted announcing the iPhone. So we move on.
Sorry, Americans, we won't be following the demise of the iPod in America except maybe in passing. To us the truth is self-evident already and has been proven more than enough. We won't return to kick a dead horse...
A CASE STUDY FOR THE AGES
Yes, now the iPhone has been announced and even Steve Jobs dares to admit that the future of MP3 players belongs to musicphones. Apple sets the goal for its iPhone at 10 million units in the first year. So if musicphones sell at about 400 million units (out of about 1 billion cellphones of all types), Apple targets 2.5% of this new market. And considering Apple's enormous ability and track record in reinventing existing industries from the Macintosh to the iPod, we can well assume they will reach the 10 million sales.
Meanwhile the announcement of the iPhone seriously impacts the demand for stand-alone iPods and further accelerates the downward price pressure for the entire iPod line. It may emerge that in the long run Apple captures a meaningful share of the musicphone (or smartphone) market. By meaningful the might even climb past single digits into the low teens. But not more than that over the next ten years. The iPod and the launch of the iPhone will go down in history as a classic case study for MBA students. Unfortunately this will not be a case study in business management excellence. Quite the contrary.
In 2004 Apple dominated the worldwide MP3 player market with about 80% market share as musicphones were entering the game. Apple had its own musicplayer project already under way by then, so clearly Apple knew the industry and customer tastes were shifting to musicphones. By the end of 2006 the iPod market share had crashed to 12.9% without a rival in the musicphones from Apple. In fact when announced in January 2007, the iPhone won't be launched until six months later providing no relief even now as the blood spills.
We have witnessed live the destruction of a market held by a globally dominating technology giant. This will be known as one of the classic business case studies of how badly a corporation can mismanage a transition to a new technology, like IBM did with the PC market. From 80% to 12.9% in only two years. This is the world record for a global manufacturer, in obliterating its own market share. The iPod case study will shortly be required reading together with New Coke, the Chevrolet Nova and IBM/Microsoft. How ironic that in 2005 we were celebrating the iPod as the greatest achievement in new market space creation?
Yes, 21 million iPods in the Christmas season, while iPods are outsold 7 to 1. Too little too late. Now Apple desperately needs the iPhone just to survive.
The iPod is dead, long live the iPhone...
UPDATE JUNE 2007 - I've just written a complete projection with regional and quarterly benchmarks, how the iPhone needs to perform to achieve its stated 10 million goal, at this blog: Crunching the Numbers for iPhone