2006: the year the i-Pod died

UPDATE JANUARY 2007 The final installment in our coverage of the decline in iPod's dominant market share was posted after Apple released its final numbers for 2006, in January 2007. iPod market share globally is now down to 12.9%, with musicphones outselling iPods 7 to 1, and yes, I have all the research data that people DO listen to music on their phones. See it here: Requiem for a Heavyweight: the Reign of the iPod is over.

THERE IS AN UPDATE TO THIS STORY. Please see Nails into the Coffin of the iPod from March 16, 2006

(Attention readers of the Carnival of the Mobilists. Please click on the welcoming message to you, either here, or to the top right hand corner of the screen, or click on the banner of the site to come to the front page. I have a welcoming message to specifically those interested in mobile telecoms matters.)

Alan and I are both big fans of the i-Pod and i-Tunes. We even have it as one of the case studies in our book Communities Dominate Brands. Certainly the i-Pod and i-Tunes were brave moves by Apple and succeeded against most early predictions in creating a new market space. By all means the i-Pod has been a great success for Apple, and quite rightly so, the IT industry likes to show off i-Pod success in what innovation is possible. Thats all good and well. And 2005 has been the year for i-Pod.

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 (and similar stand-alone MP3 players such as those by Creative Labs).

Is this such a wild prediction? There are those who are passionate about i-Pods who will immediately protest, and say that mobile phones don't have the memory capacity to store tens of thousands of songs. And that the i-Pod user interface is intuitive while those on mobile phones are clumsy. The music sounds better on an i-Pod. The device is sexy and cool, and has much better controls than those on mobile phones. And the prices of i-Tunes are nowhere near as onerous as most music direct sales prices by mobile operators. The music consumption proposition is simply better on an i-Pod than on a mobile phone.

And I am not disputing that. I start by saying that back in 2001 the PDA makers looked at the early "smart phones" and pooh-poohed those as being toys. The screens were tiny, the applications weak, the interfaces clumsy (such as no stylus), the built-in memory laughable, and almost no independent software applications even existed. There is no doubt that stand-alone PDAs were (and still are) superior technically to smartphones. But mobile phones are the predominant digital device, the only universal gadget on the planet. What the mobile phone wants, it gets. By 2003 worlwide sales of smartphones had shot past those of stand-alone PDAs, and today smartphones outsell PDA's by a ratio of over 8 to 1 !

In 2002 the digital camera industry looked at the earliest cameraphones and dismissed those as toys. The picture quality of the first VGA standard cameraphones was horrendous. There were no abilities to make any significant adjustments. No flash, no zoom, no place to connect a tripod. The screens were tiny and grainy. Pictures that were printed would be horribly bad in print quality, nothing to compare to the prints by a decent quality stand-alone digital camera. There is no doubt that stand-alone digital cameras were (and still are) technically superior to cameraphones. Again, the mobile phone is the predominant digital device, the only universal gadget on the planet. What the mobile phone wants, it gets. By 2004 worlwide sales of smartphones had shot past those of stand-alone digital cameras, and this year 2005 more cameraphones are sold than all standalone digital cameras ever made...

So it is not a question of is the i-Pod better technically. Of course it is. If you want to buy a really good music player, you will start by considering the models by i-Pod and maybe some of its close rivals. You don't even start off by considering the mobile phone as a music player. But portable music players do not sell 750 million units every year. Mobile phones do. Portable music players are not replaced every two years on average. Mobile phones are. That means that whatever is the standard features of a mobile phone will be sold to us whether we really prefer that device or not. Because of the overall size of the market for mobile phones, and the speed by which they are replaced, this means that the music player will become a common feature next year. People will acquire MP3 player ability almost by accident, simply as they replace their phones.

For a part of the year, probably the Spring of 2006, there will be fierce debate about which model musicphone is nearly as good as any given i-Pod and what are the recommended models by the techology press, etc. Those technology stories will conclude almost universally every article, in saying something like "but this musicphone is not really a viable substitute for an i-Pod." The mass market will not care. The common customer walks into the mobile phone store and considers among a range of phones. If one of the candidates is a smartphone with business applications like word processing and spreadsheets, and another is a smartphone with advanced music features - I promise you the mass market will go for the music rather than the business applications.

Some will think this is a preposterous vision of the future. I want to remind that most of the integrated devices we have today, were separate at their inception. Look at the back of your computer, where the telephone wire (or network cable) connects to your modem (or LAN card). Still as recently as 1990, almost all modems were sold as stand-alone devices as "peripherals" and optional extras for personal computers; not built-in. How about that camcorder you use to tape your kids? Back in the early 1980s all video cameras had separate stand-alone videorecorder units. Connected by cable. The recorder with its battery was on a bag hanging on your shoulder, connected by cable to the videocamera you held in your hands. And that boom box that your kids use to play rap music? In the 1970s when the cassette recorder was introduced as a music device (the c-cassette was originally launched by Philips in the 1960s as a dictation machine media format) the cassette recorders/players were separate stand-alone devices that had to be connected via cables to the radios or record players if you wanted to record music. What now may seem like obvious integration, all started as separate stand-alone devices.

In some cases integration involves capabilities of almost no overlap. That is why most cappuchino makers are not also microwave ovens, even though we use both at our kitchen. There is little technical merit in attempting to combine the functions of a submarine with an airplane. But in the case of the i-Pod and similar MP3 players and the mobile phone, there is tremendous overlap. The phone is already a voice device (for speaking). It has both a built-in speaker and the outlet for a headset (not to mention many have built-in Bluetooth for wireless headsets). With video, internet and camera, the mobile phone has the screen - in fact often superior screens - to the i-Pod. Now with smartphone features the phones ship with considerable amount of built-in memory, and recently with the ability to add memory via separate memory chips. And the mobile phone is already a battery-operated device. We already carry the mobile phone with us every day. Even fanatical i-Pod users don't carry the player everywhere everyday, but they do carry their mobile phones.

What makes the mobile phones's global competitive advantage almost too good, is that mobile phones are subsidised in most markets. In other words we can have a new phone "for free" for example here in the UK, when we renew our contract (or sign a new one). That means that in most markets where buyers have to pay full price for the i-Pod, they can have the somewhat inferior music player "for free" with their next phone upgrade. The young employed population in Europe already carries two phones, so one of those will come up for renewal in the next 12 months. That alone is something like 100 million music-players sold during 2006.

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..

I do not mean that in 2006 the i-Pod literally dies. I recognise the title of this blog is provocative in that way. But I do mean that it is the year when it suddenly stops being the darling of the IT industry, and also stops being the "must-have" gadget by so many. Next year both in terms of MP3 players sold, and in terms of direct sales of music (like i-Tunes) will belong to the mobile phone.

Also you don't need to take my word for it. The recording industry itself sees the mobile phone - not the PC, PDA, i-Pod or stand-alone MP3 players - as the future for the industry. At the American CTIA trade show for mobile phones, Warner Music's Chairman and CEO, Edgar Bronfman, said "Wireless will become the most formidable music platform on the planet." And in last week's New Media Age, EMI Vice President of Digital Development Ted Cohen admitted that the mobile phone will win out over stand-alone music players.

Only I tell you it will happen sooner than they thought. 2006 is the year. Mark my words.

Comments

[Martin Geddes]

I'd agree with the outcome, but I think it'll take a while longer (an extra 12 months, maybe). Two reasons: DRM will continue to delay product deployment and confuse end users. And iPod users tend to listen until the battery is flat, whereas cellular users will go to great lengths to conserve that last bit of battery power to ensure they stay in touch. Reconciling these different behaviours will take another cycle or two of battery technology.

I'd also add carrier stupidity to the list of things that will delay roll-out. They'll want to do over-the-air downloads of songs etc that put the network in the middle. Users will want tethered downloads at first, as they are cheap and quick, and match existing behaviour patterns.

Some of the iPods also fill specific niches. For instance the shuffle is truly wearable and suitable for going jogging with. Your cellphone generally isn't wearable in the same way.

Navigating the list of artists and albums doesn't lend itself well to the current 5-way clicker UI paradigm. Expect to see a string of product failures until handset makers understand the functional important of the scroll wheel, and innovate new handset UIs for navigating large information spaces. And then we'll see all sorts of unintended consequences as that UI enables a whole bunch of new applications!

[Tomi Ahonen]

Hi Martin

Good points and it may be that the truth lies somewhere in between. I am now steered by two recent phenomena. The first is how immensely rapidly the mobile phone actually took over the dominant position in PDAs and digital cameras. I was sure the mobile phone would win out eventually, but I was certainly amazed how rapidly that happened.

The second is the immense scale of mobile phone total sales. The i-Pod total sales are somewhere at 25 million or so sold over the four years they've been on the market. Nokia sells 25 million mobile phones every month. Its a bit like IBM originally when it looked at the nuisance of the "toy" personal computer market. Then when it spotted that is going to be relevant, they entered it and almost overnight dominated the market (until the idiots they were, gave away all of their market strength to Intel and Microsoft, but that's another story)

But we'll see. Yes, definitely it will happen, but will it be that fast as I now think :-)

Tomi Ahonen :-)

[Oscar Merida]

I'll be surprised if any carrier in the US doesn't go with a more restrictive, DRM laden file format for the music they sell and sync to their phones. There's potentially a lot of money to be made if they can make it so that the only music you can get on your cell phone can be bought from them and heard on their phones. Of course, the rest of us will try to steer our family and friends to non-encumbered phones.

[ocasta]

Another of the issues that will slow down the whole process is getting the music on to the phone in the first place. There are two options - copy from a PC or download direct to phone.

The bigger potential market (both from the number of potential customers and the preferred carrier revenue) is the direct download customer. Although the market for ringtones and wallpapers looks big, most people don't download more than one or two a year. Music isn't like this - you want lots of it. Lots of downloads means high bandwidth. Most people aren't on 3G and wont be in the next 12 months. You want to choose from a big library. Navigating around iTMS and the average carrier portal are not comparable experiences. I can't imagine having to struggle around a portal to buy lots of music - one ringtone or one game maybe. So the UI problem has as much impact on buying music as on listening.

So then the alternative is PC download and copy. Having a PC to download and install music takes away the revenue from the carrier and is not going to be the preferred option. Those people that do have their music on their PC then they probably have a favourite library tool. Manufacturers need to make it easy for these customers to download to their phone, not impose the use of their propritary software package.

So while there maybe many more music phones in circulation in 12 months time, I expect that music spend per customer will favour the iPod owner with the simple, large screen buying experience.

[Tomi Ahonen]

Hi Martin

Ok, fair points. But, again the big picture is changing incredibly rapidly due to the global economics of cellphones. Your point is becoming moot before you even know it..

We hit the global 50 million 3G subscriber point in September 2005 - thats about twice as many people worldwide have a 3G phone already than have an i-Pod. Yes, two thirds of that is in Korea and Japan, but the rest of the world is following their lead. Hutchison/Three just yesterday came out with 3G music sales - direct full-length MP3 track sales to their 10 million subscribers in nine countries. Its already up to 30 million songs sold in less than 18 months from launch. This transition is as inevitable as it is that the night follows day. But like you say, perhaps the exact timing is still unclear :-)

The 3G phone population will more than double in the next 12 months and double again from that in the next year. Putting it in context, there are about 75 million PDAs and about 250 million laptops in use. Excepting for the USA, the rest of the world will pretty much skip the i-Pod "download to a PC, buy an MP3 player, transfer songs to the player" mode, and just use their new 3G phones directly as music players.

PS "although the market for ringtones looks big" ??? I beg to differ. at 5.4 billion dollars worldwide in 2004 - thats 18% the size of the total worldwide music industry !!!! Out of a technology invented in 1998. This is not something that "just looks big" it is HUGE. The only growth for the music recording industry has been the royalties earned on ringing tones (a tiny fraction of the billions). Every hit-making recording artist from Robbie Williams to Kylie Minogue to 50 Cent earn more on their ringing tone sales than the sales of their singles on the hit parade.. I promise you, the record industry is kicking itself for not capturing more than a few hundred million of that huge cake, and they really REALLY don't want to miss out on the rest of this. And yes, to put the billions in context - the total revenues of i-Tunes were 300 million dollars, and obviously the record labels don't get all of that. A drop in the bucket compared to the huge ringing tone biz.

But yes, the mobile phone sales numbers are a steamroller. They simply dwarf all other devices on the planet...

I just love this business, as you can tell, ha-ha...

Tomi Ahonen :-)

[Michael]

For his upcoming book, Sound Moves: iPod Culture and Urban Experience, Michael Bull (sussex University) interviewed more than 1,000 iPod users, mostly in North America and Europe, and discovered that a good 25 per cent of them actually hated cellphones. They didnt want convergence.

They would not use their phone when listening (to their iPods). They would wait until they'd finished listening to their music. You would need to be able to turn off the phone while been able to listen to the MP3 function and that dont make sense for a convergence device.

When Im jogging, on a plane or listening to a favoutite album, I dont want to be interupted by a ring tone!

Michael

[Tomi Ahonen]

Hi Michael

Looking forward to your book ! How did you like ours? We obviously love the i-Pod as we have it as one of our case studies etc.

You know, of course, that the reverse of your argument is that if 25% hate the cellphone, then arguably 75% like it? But yes, I will happily grant you that the majority of those 25 - 30 million who have already bought i-Pods love them and some actually do hate cellphones.

But the i-Pod userbase is nowhere near a mass market. 750 million cellphones sold EVERY YEAR is a mass market. Already today more MP3 player-enabled cellphones are sold than i-Pods, and more direct full-track music is sold to cellphones than the total sales of i-Tunes. The tide has turned, and now the gap in the favor of cellphones is only increasing. By 2006 the lights will be out.

Yes, i-Pods will have their loyal fans for a long while, and those who are "serious" about music will have them. But the mass market will go for the "good enough" which is the MP3 player in the cellphone. Today already in Korea Samsung already sells cellphones with 5GB of storage space on music phones. Nokia is only now releasing its serious music player phones. The real comparison is not with the lame MP3 player cellphones from this year and last, but rather next year, the battle is between the giants.

And in sheer numbers, Apple cannot - physically cannot - match the size of the cellphone market.

But I'll happily grant you that the loyal dedicated i-Pod early buyers are very fanatical about the device - and very typical to Apple, its customers tend to be fiercely loyal. Excellent marketing there.

It never helped Apple crack the mass-market for PCs either. This is the same trend. i-Pod for a niche, cellphone based basic musicphones for the masses. Sorry...

But as I said, am greatly looking forward to your upcoming book. Please send us an e-mail Michael when it is released, ok?

Tomi Ahonen :-)

[Paul Jardine]

Here's another perspective on this argument. I agree with Tomi that the greatest number of MP3 players will be in mobile phones in 2006 (maybe in 2005 already??), but I don't think that the largest number of MP3 tunes bought will be delivered via the mobile networks. Many of the devices in 2006 will have wifi (including mobile phones) and downloads at home over broadband from iTunes (or P2P software) will be dominant.
So, while people may listen to their MP3s on their phones, they won't be buying many songs from the operators. Unless of course, the operators decided to price competitively and not charge for the data part, but I think they are too greedy for that, they want the walled garden and restrictive DRM. That will be their downfall.

[Tomi Ahonen]

Hi Paul

Good comment, and I kind of agree with it..

It may surprise you (or other readers of this posting) that already today full-track MP3 songs sold to mobile phones exceed the total sold to i-Pods via i-Tunes. In 2004 the numbers were less than 300 million dollars for i-Tunes, and over 400 million for direct sales to mobile phones. I'm not talking about ringing tones (a HUGE business, ring tones alone worth over 5 BILLION dollars in 2004) not do I mean other "inferior" music downloads to mobile phones, like real tunes and ringback/waiting tones etc. No, full track MP3 sales already exceed i-Tunes sales globally and the margin is growing dramatically in favour of the mobile phone. Will probably be twice that of i-Tunes by the end of this year.

But you pose a very interesting comment. That more actual songs would be loaded "free" than paid for, due to WiFi networks etc. I find that argument very compelling. The youth and young adults are very well versed in Napster, KaZaa, Grokster etc and immediately when they get their mobile phones capable of playing the MP3 tunes, they will attempt to connect via their bluetooth connections etc to nearby PCs, and yes, soon also as WiFi chipsets appear in more mainstream phones, will also use WiFi etc.

I do find your argument compelling. So in terms of orders of magnitude, probably i-Tunes sales will explode next year, dramatically more than now. But for the sheer numbers of handsets, the direct sales to mobile phones will be much more, by next year probably 3x maybe even 4x as much as i-Tunes. And then your argument, probably even more than those two, the biggest amount of MP3 files, will be the unpaid, shared, and often "illegal" downloads on free wireless networks.

Good point, Paul...

Tomi Ahonen :-)

[Tomi T Ahonen]

UPDATE - Apple released its iPod sales numbers for the second quarter ended June, on 19 July 2006. iPod sales crashing further from the first quarter, and down 45% from the peak at Christmas 2005.

At the same time each of the big 5 phone makers has reported huge increases in musicphone sales, ranging from 33% to 100% increases. The industry will ship 270 million musicphones this year (and perhaps 30 million iPods).

By the just released numbers, for this quarter, the iPod market share is down to 14% and falling fast.

See the full blog including all updated stats, industry analyst opinions, full quotes from music execs etc at this permalink:

http://communities-dominate.blogs.com/brands/2006/07/demise_of_a_dar.html

Thank you

[Oni]

It seems your predictions turned out to be a little off.

It's now coming towards Xmas season 2006 and the iPod is looking to be
in a very strong position to dominate the christmas tree this year.

Add to this the forever rumoured iPhone, which most of us are pretty
sure will come out next year is going to share the same success as the
iPod.

[Tomi T Ahonen]

Hi Oni

(First, thanks for posting again this comment. We were totally swamped with spam, had over 1900 ads splattered all over our blogsite during the past weekend.)

Thanks for writing. I would not be so fast, lets see how the numbers pan out. While Apple was in the doldrums this Spring, the phone makers have been issuing record quarters one after another. SonyEricsson just yesterday talked about its Walkman phones. These top-end music phones were released a year ago, and today account for a quarter of SonyEricsson's all phones shipped. This is very much in line with the various announcements from Motorola, Nokia, Samsung etc - Nokia for example says its musicphone shipments will "more than double" this year.

But yes, I will track the numbers and report on them. Honestly, I do expect an Apple iPod surge towards the end of the year, Christmas sales. But overall, I am totally convinced Apple will not double its iPod sales from 2005. If that is the case, and phone makers do double theirs - then Apple will go further back in its market share.

But it is too early to say. Lets wait until the numbers come out.

As to the rumoured iPhone. I would very strongly welcome it. Apple makes excellent user interfaces, and any iPhone would no doubt shake the phone industry - some of whom are horrible at user interfaces. It would be most welcome.

but also keep in mind, the phone business is brutal, with huge volumes and very slim margins. Former number 4, Siemens, was taken over by BenQ mobile a year ago. They announced they are quitting the business last week. Its a very rough game to be in...

Thanks for writing, we'll track the situation and report on it as the numbers come out

Tomi Ahonen :-)

[Cameron]

From ethnographic research I worked on with the leading 3G company, one of the biggest issues for service uptake was people losing their mobile headsets. The typical lifespan for these is about 14 days, after which the phone and all its lovely services are effectively useless. Unless you're an antisocial teenager looking to 'appropriate' public space as private space (as Timo Kopomaa would surely tell us)...

The 'killer app' for 3G and music mobile would be a simple 3.5mm headphone jack! That, plus of course a simple way of transferring your MP3 collection to your mobile, backed with longer format audio downloads (e.g. podcasts)

If you browse up on your old Andrew Odlyzko, you'll also note that people value content over connectivity, and hence the mobile phone element will always take precedence over content/music etc. The battery issue is going to be crucial, people aren't going to tolerate being out of touch because they've listened to a few tunes too many. Integrated digital cameras are maybe used for the tiniest fraction of the day, built-in games in interstitial moments, but i guess you could spend more of your day listening to music than being on the phone (pretty likely in fact). Which might make more of a case for a standalone device, albeit potentially mobile enabled.

Incidentally if, as written elsewhere on this site, European 'Generation-C' carry 2 phones as a matter of routine, might they not instead have one which is more phone-centric (small, long battery life) and one which is more entertainment/content focused with a bigger screen? A bit like businessfolk carry around a Blackberry and a mobile - the two perform quite different roles.

The key will be enabling some sort of wireless connectivity between the two (?) and/or giving the mobile opcos a way to monetise it, rather than being the leading subsidiser of mobile music players as well as digital cameras - the latter being recognised within the industry as a major own-goal, given the cameras are of such high quality that MMS is no longer a real/credible possibility.

[Tomi T Ahonen]

Hi Cameron

Very good points. Yes, I agree with the overall themes you present, and like the observation you make about 2nd phones in Europe (and Asia as well). I think you probably had a typo when you wrote about connectivity and content, am sure you meant from your context that we value connectivity more than content. Obviously it is why the phone is carried 24/7, but pocketable TVs, radios, CD players, iPods, gameboys, PSPs etc are not carried constantly. As we've reported 60% of all phone users take the phone physically to bed with them, and 73% use the phone as the alarm clock....

But yes, two phones (even 12% of Americans already are in this category, so its no longer an European Gen-C phenomenon ha-ha). Yes, I am pretty sure the users with two phones will differentiate. One to be the high-end smartphone optimized for whatever is the preference - very good camera with moderate other smartphone features; or very good music with moderate camera, web etc; or very good web surfing phone, or built-in digital TV tuners; or very good e-mail (eg Blackberry and clones) etc.

And then the other phone as a very slim, slight, cool, sexy 24 hour phone, a Razr or something like that, very slim and sexy, while compromising perhaps with some top-end features.

Thanks for writing Cameron, visit us again!

Tomi :-)

[mc]

iPhone for the win :)

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The white iphone 4 hardware design hasn't changed from the one we already knew about. It uses the same materials as the prototype: Black glass and stainless steel rim.

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It seems your predictions turned out to be a little off.

It's now coming towards Xmas season 2006 and the iPod is looking to be
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Add to this the forever rumoured iPhone, which most of us are pretty
sure will come out next year is going to share the same success as the
iPod.

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