Demise of a Darling: iPod market share crashes to 14% amid management denials

Apple has just released its April to June quarterly sales figures for the iPod. At 8.1 million units, this is the second consecutive drop in sales.

UPDATE JANUARY 2007 - we have just written the final chapter to this iPod saga as Apple reported its final numbers. The final market share of iPod is 12.9% for the year 2006 with musicphones outselling iPods by 7 to 1. Yes, the data is also in that owners of musicphones do listen to, and download music to their phones. Read it all here - Requiem for a Heavyweight: iPod reign is over

UPDATE SEPTEMBER - Welcoming Arstechnica discussion board visitors. We have a welcoming message for you to put this July posting in context. I suggest you read your welcoming message first at this link:  [Welcoming Arstechnica Visitors]

RELATED UPDATE JUNE 2007 - if you would like to see my projection of how the iPhone needs to sell regionally, and quarterly, to achieve 10 Million by Dec 2008, read this blog: Crunching Numbers for iPhone

UPDATE - please observe the two graphs I have posted that explain the matter very quickly for you. Then please return here for the full analysis. I think it helps to see the two graphs first. They are at this link: [Apple quarterly iPod sales, iPod and musicphone sales]

We wrote about the battle of the pocket in our book, Communities Dominate Brands, and in the book predicted the mobile phone would crush pretenders, from PDAs to digital cameras and yes, stand-alone MP3 players like the iPod. At this blogsite last October, when Apple was celebrating 16 consecutive quarters of growth and facing its greatest quarter ever - its 17th up to the record-breaking Christmas sales for 2005, we made that bold prediction that from 2006 the Apple iPod would face a total collapse of its market ("2006 the year when the iPod dies") . As Apple had not indicated any softness in iPod sales in its guidance at the time, and everybody - including us - believed the Christmas quarter would be record-breaking, this was quite a brave - and lonely - prediction. Just read through some of the intense critical comments we received back then by the iPod fanatics.

The first quarter of 2006, January to March, did in fact present Apple's first-ever downturn of iPod sales. Not a slow-down in growth or a "dip" in sales. A catastrophic earth-shattering crash of 40% drop in sales! Most companies would be devastated but Apple put up a brave face cunningly claiming that this was suddenly a "seasonal downturn" after the phenomenally successful Christmas sales of 2005 and misdirecting focus that compared with the previous year, iPod sales were still up.

We pointed out in our blog of April ("Nails into the Coffin of the iPod"), was that in Apple's previous four years there had never been any seasonal downturn of shipments. Every January-March quarter had been better than the previous October-December quarter. And again the April-June quarter again stronger than the first quarter of eachg calendar year. Where did this sudden "seasonal downturn" come from? In the first four years of the dramatic growth for the iPod there never was a seasonal downturn in January.

The whole MP3 player market worldwide for the second quarter of 2006 is not 10 million units, from which Apple could claim four out of five units. In reality the MP3 player market is about 56 million units (48 million MP3 playing musicphones, 8 million iPods, and 2 million non-Apple brand stand-alone MP3 players). So Apple's quarterly market share is not 77% like it was back in 2004 before musicphones. In this quarter Apple's market share is 14%

As we forecast in our book and on this blogsite, at the end of last year the battle for MP3 players shifted and is now fought in the pocket. And the undefeated world champion in that market share war is the mobile phone.

Was unavoidable

We've seen it all before. It was to be just like the brief massacre of the PDA markets - totally crushed by "smartphones" in only two years from 2000 to 2002. The world's bestselling PDA today, by a wide margin, is the Nokia Communicator - a smartphone and also by far the most expensive of all PDAs. As a result of the smartphone cannibalization of the PDA market, one of the world's largest PDA makers, Sony, totally pulled out of the PDA market in 2004. Most PDA makers rushed to bring converged devices in a defensive mode, with cellular phone capability added to the PDAs.

Then we witnessed the equally brief and lopsided market battle of the digital cameras where cameraphones emerged victorious also in just two short years. From 2004 the world's bestselling digital camera brand has not been a traditional camera brand like Nikon, Canon, Minolta or Kodak; the world's bestselling camera brand is been Nokia. Last year fourth-place phone manufacturer SonyEricsson alone shipped more digital cameras than all stand-alone digital cameramakers combined. And again the previous masters of this field admit defeat as the world's second largest camera manufacturer, Minolta-Konica announced in January 2006 they were quitting the camera business.

The writing was on the wall. We foresaw the brief but decisive battle where the iPod and other stand-alone MP3 players were predestined to emerge as the losers. I predicted the battle to last the full year of 2006, even I was not prepared for the total carnage that the phone makers reaped upon the iPods and other stand-alone MP3 players in only the first half of 2006. From a high of near 80% in 2004, the iPod's market share is now down to 14% - and still falling!

How could this happen?

Apple had the MP3 market mostly to itself until last year. Yes Creative Labs and a few others did make rival stand-alone MP3 players, but the big phone makers had ignored the musicplayer market as being too small (yes a market of 10 million per year is too small for the phone makers to even bother with). It wasn't until in 2005 that they decided the MP3 market was growing to be big enough to be worth going after.

Around year-end of 2005-2006 suddenly all major handset makers released their major music phones. Nokia's N-Series. Motorola's iconic Razr series has been upgraded and most Razr V3 phones now include MP3 players, as do all Motorola Pebl, Slvr and Rokr models. SonyEricsson finally capitalized on its global Walkman brand. Samsung pushed the technology boundaries by releasing the first phone with 50% more capacity than the iPod Nano. And not to be left outdone, LG released its Chocolate, another music phone.

During 2005 Apple sold 22.5 million iPods and had accumulated 40 million devices shipped since its launch in 2001. During 2005 alone, Nokia shipped 40 million musicphones. And this was before Nokia got "serious" about the musicphone market. Nokia did that this year with the launch of its N-series. In February Nokia musicphones were shipping so strongly, that Nokia said it would ship over 80 million musicphones this year.

Apple pleads mercy that the MP3 player market is in seasonal decline, while its biggest rival who already sells more than Apple, reporting DOUBLE growth in the same period. Keeping in mind that Apple sales were down 40% in the first quarter, and down a further 5% in the second quarter - since its peak of only six months ago, Apple is now selling only half as many MP3 players.

But Apple has every reason to be satisfied

We need to point out that iPod sales numbers of 8.1 million in a quarter are wonderfully good results within the IT industry accessories and gadgets market. For some contrast and magnitude, another IT industry technology-darling, RIM ships less than a million Blackberries per YEAR. The total global annual market for stand-alone PDAs is about 11-12 million - meaning that Apple ships more than twice as many iPods as all stand-alone PDA makers ship their pocketable gadgets combined. And these all are devices of roughly similar price.

So yes, for Apple the computer manufacturer, this level of sales of iPods is well in excess of what their business projections had for five years into the future; and if viewed only in context of the IT/PC industry, even with its market share crashing, for Apple the iPod is a huge success, even in 2006.

Only don't think of the iPod as a successful MP3 player in 2006. Just by Nokia's numbers alone, Apple has already lost the war. Nokia alone ships more than twice as many MP3 players as Apple does this year. Game over.

But it Its not iPod vs Nokia

Yet to end on Nokia would be totally unfair on the rest of the phone industry. Nokia is a relative late-comer into the MP3 player market which was invented and developed in Korea and Japan, by brands like Samsung, LG, Panasonic, NEC etc.

In the same time that Apple pleaded a decreased seasonal demand for iPods, the world's second largest phone maker, Motorola was proudly reporting that its Razr phones - and yes most Razr V3 models are musicphones - were their phones with the highest demand. For whatever early miscues there had been with the Rokr phones (the so-called "iPod phones"), now the Razr is a surefire hit. Yesterday Motorola reported it has shipped its 50 millionth Razr. So in a little over a year, only one phone model from Motorola's range has all but matched Apple's total iPod effort across all iPod models for five years. This is not a contest, it is a bloodbath.

Not to be outdone, the fourth largest phone maker, SonyEricsson reported on the Walkman branded high-end smartphones it released last year. In its first five months up to Christmas 2005 SonyEricsson shipped 2.5 million Walkman phones. In the first quarter of 2006 SonyEricsson shipped 3 million more Walkman phones. A growth of 100%. Bear in mind, this is that same quarter which Apple claims was a seasonal "downturn". Now, for its second quarter SonyEricsson says its overall sales are up 33% and that growth is led... by the Walkman series of musicphones.

Samsung kept on releasing ever more sophisticated musicphones and its local rival LG did the same. A fascinating statement came from Europe's largest phone retailer, Carphone Warehouse - which said that the LG Chocolate - a music phone - is the best-selling phone in their stores - the best-selling phone of all time. This in the supposedly "saturated" European market of mostly replacement phones? Yes, with a fall from 80% to 14% market share in 18 months, the iPod is wilting away before our eyes.

But the iPod is a better music experience.

Some will say that the iPod is technically better than musicphones. They complain that the MP3 player they've tried out on some musicphone was not as good as the iPod (its best described as a toy) or that the iPod user interface, music storage ability, music library etc is better. The "my technology is better than yours" argument.

That is a totally irrelevant argument. I can immediately grant you the argument. You win! Yes! You win! Yes the iPod is inherently better than any musicphone, for listeing to music. I totally completely without a doubt give you that argument. YES the iPod is inherently better.

But that is irrelevant. IRRELEVANT. Just being technically best does not give you market leadership. A Ferrari or Rolls Royce is technically a better car than a Mitsubishi, Chevrolet or Renault. Yet Ferraris and Rolls Royces are niche markets. The Sony Betamax was technically superior at every generation to its VHS video recorder rivals, yet Betamax lost the VCR wars. The Concorde was technically superior to its compatriot, the Boeing 747 Jumbo Jet - and forecasts from 1960s suggested a larger market for Concordes than Jumbo Jets, yet only 14 Concordes were ever manufactured against over 1000 Boeing 747's.

And the ultimate proof lies with the Apple Macintosh computer. For every generation it has been superior to the IBM-compatible (Dos) and Windows PCs yet Macs are a niche proposition with well under 10% of the PC market. If technology decided, we'd all use Macs and Windows would be a forgotten relic. But its the other way around. Macs are the rarity among personal computers, no matter how much every generation of Macs has been technically (and by its user interface etc) better.

So who cares if the music experience is better on an iPod. If Apple's market share has plummetted from 80% two years ago to 14% today, the battle is totally over. Apple cannot recover.

Then there are those who say most musicphones are not used to consume music. First, I'd immediately point out that neither are all iPods. There are plenty of iPods used for example in education for recording lectures, for various podcasts, for video consumption etc. So comparing "apples to apples" - no pun intended - we'd need to compare the iPods and the mobile phone's abilities to consume all digital content, where mobile phone experience is vastly superior.

The phone is always connected. The phone has a built-in response channel (SMS text messaging), a built-in payment channel, and allows placing and receiving phone calls. A phone is far superior overall as a multi-purpose data device, than an iPod. Just on videos alone, the UK mobile phone network Three/Hutchison reports that they have sold 15 million music videos to their 3G phone users in a little over a year, in a market where they have 5 million phone users. Worldwide there are 2.4 billion mobile phone users - over 200 million of those are 3G phones - all which can not only play music, but can download music directly off the air (like iTunes only better) and can "stream" music ie like listening to radio and can identify music via Shazam -type services and can play ringing tones and can display music videos over the air. A vastly superior complete music experience than what iPod could ever hope for. And Apple's total shipped iPod population even now in July 2006 is a bit over 58 million.

As to music consumption? Where does most music come from to iPods? Not from iTunes, it comes from the personal libraries of the users, ripping music from CDs onto MP3 files. Ask those people would they prefer to carry two devices or one - as everybody carries a phone - and so far every person I've ever asked the question said they'd prefer to carry one device, combining the phone and the MP3 player.

But iTunes sells millions of songs?

Then what of iTunes? Yes, a wonderful innovation for the music industry. Yet as the vast majority of portable devices are already mobile phones, not iPods, so too is rapidly the shift in music sales. The IFPI (International Federation of Phonographic Industry) collects the global data on all music sales and coordinates the royalty payments worldwide as the umbrella organization for example for the RIAA (Recording Industry Association of America) for American numbers etc. They have been reporting on iTunes (and other online digital sales) of MP3 songs for many years now.

The first MP3 songs sold to phones were introduced in the summer of 2003 in South Korea. The IFPI said that for 2004 the total sales of music to mobile phones worldwide was so trivial that they did not bother to break it down (ie much less than 1% of all digital music sold). But with enormous growth, for 2005 the IFPI reported that MP3 full-track music sold to mobile phones was 40% of all digital music sold. iTunes was the biggest part, but there were also other legal online sales outlets such as the re-introduced legal version of Napster, etc.

Now for the first quarter 2006, the IFPI reports that already half of all music sold goes directly to mobile phones. (oh, and this is true MP3 music, not ringing tones. The Ringing Tone business is more than ten times larger than iTunes, over 5.1 Billion dollars worldwide in 2005. I'm not talking about ringing tones here). And as the IFPI reports music sales to phones growing rapidly, what did Apple tell us in its quarterly review? its other music revenues (iTunes) are DOWN by 6%. Again the same shift from iPods to musicphones.

The tide is turning. Inevitably. Irreversably. The majority of the devices are there, the majority of the users are there. The majority of the money is there. The majority of music sold is also there, on mobile phones, not on iPods.

And what of the users themselves? The first landmark independent study by TNS of 6,800 adult users came out earlier this year reporting that already twice as many people consume music on musicphones than on any brand stand-alone MP3 players including iPods, and more tellingly 35% of the total population wanted to consume music expressly on their mobile phones. Nobody wants to consume music on a separate portable MP3 player when they have to carry their mobile phone with them anyway. It is common sense, after all, but now we have the definitive study on it as well.

All numbers stacked against iPod

I want to remind readers of the big picture economics. In Apple's record year it shipped 22.5 million iPods last year and has shipped about 58 million iPods in the past 5 years in total. The mobile phone industry ships between 950 million and 1 billion mobile phones this year alone. Yes, last year about 40 times as many phones shipped as iPods.

Not all have MP3 players, obviously. But this year at least 20% of those - more than likely 25% - will be musicphones. So anywhere from 190 million to 250 million musicphones will ship this year. Even if Apple somehow managed to DOUBLE its annual sales from last year and reach 45 million units sold this year - and trust me they won't perform this kind of miracle - NONE of the market analysts suggest Apple would double its sales for iPods this year - its market share this year would still be between 18% and 23%. Apple cannot recover from this loss.

How often are iPods replaced? I don't know. Certainly some of the iPods go to existing users who want for example a smaller iPod like a Nano, or who have issues with reliabilty, broken screens, battery problems, etc. Therefore the total iPod user base is significantly LESS than the total shipped units of under 58 million so far. The total phone population is 2.4 billion worldwide.

Phones are replaced every 18 months. 20% of Europeans have two phones (or more precisely have two subscriptions, most of those people also have two phones, but not all). For those who have two phones, the effective replacement cycle is 9 months. How rapidly does everybody who ever wanted a portable music player, get it "automatically" as part of their next upgrade?

What happens to the older phone? It gets passed onto kids - who all want the new musicphones but often cannot afford them. While the replacement cycle is very rapid in mobile telecoms, most of the cool phones that have been replaced by newer models, are recycled within the families to children, younger nephews and nieces and cousins etc.

But who is the competition. Apple is doomed here. The big five phone makers, Nokia, Motorola, Samsung, SonyEricsson and LG are all companies with deep pockets in research, and about a decade of history of doing pocketable consumer devices. No matter how much Apple can create iconic designs, they are now up to the world's best rivals in this space.

And by now every phone maker has released their first or second generation of musicphones. But the phone market is not only 40 times larger than the MP3 player market, the phone market is fierce in its competition. Apple releases a couple of new iPods per year. Nokia alone releases a couple of new phone models every month. With global competition and dozens of smaller rivals from Taiwan and China, and creative input from the major mobile operators like NTT DoCoMo, Orange, Vodafone, etc, the phones rapidly keep getting better and better. There are literally several hundred new phone models every year. Cameras were introduced four years ago and in 2005 over half of all phones shipping had built-in cameras. It does not take long for most phones to incorporate MP3 players. Apple cannot hope to compete against this many rivals in so many diverse markets.

Already today, in the Spring of 2006, the independent technology press reviews of SonyEricsson Walkman Phones, the Nokia N-Series and the LG Cocolate phones are all on par with iPod Nanos. Bear in mind you don't NEED to have technical superiority to win in the market place. But if Apple's rivals catch up on the technical side of the MP3 player on the phone, Apple's second-to-last competitive advantage is lost.

What of the iconic state of the iPod?

It is easy to fall into the trap of the white earphones. Next time on a longer journey in public transport - whether in a train, bus, underground, etc - observe those with white earphones. Then observe what device emerges when they change tunes? Its no longer that white earphones equals iPod user. Now many phone makers - and other MP3 maker rivals - as well as independent earphone manufacturers - offer white earphones. More than likely those white earphones are connected to a device other than an iPod. The person wants to appear cool - with white earphones - without actually having an iPod. So much for iconic.

Phone is addictive - and iPod is not

As to the phone? No device has as severe addiction as the mobile phone. The recent study by Queensland University in Australia revealed that the addiction to mobile phones is as strong as that to cigarette smoking. We cannot live without our phones. We take them literally everywhere including to the bathroom. The BDDO study from last year revealed that 60% of the phone owners on the planet take the phone physically to bed at night. And the Nokia survey of 5000 users this spring showed that already 72% of us use the phone as our alarm clock (and extrapolating from these two studies, apparently 12% place the phone at our bedside table...)

The most severe punishment you can inflect upon your child is not to take away Playstation privileges or remove the iPod. It is if you take away their mobile phone for the weekend. The Mobile Youth study showed that teenagers in the UK today - the world's third biggest music market after USA and Japan - spend 8 times more of their disposable income on mobile phones than on music. Yes the iPod is iconic. But the mobile phone is the only must-have device. The iPod is an optional extra. Game over.

Last nail into the coffin: Subsidised handsets

Then the ultimate killer. Subsidies. Most Western markets have handset subsidies, which mean that a new mobile phone will be sold at a nominal price of anything from zero dollars to 20-50 dollars. A small fraction of the true off-the-shelf price in the 200-300-400 dollar range. But iPods are never subsidised. So compare 200 dollars for the iPod or 25 dollars for a musicphone? The economics totally tip the balance against the iPod. So people can get their MP3 player "for free" as simply part of the upgrade and contract renewal for next year.

And finally, if you don't like our view on this. Lets go ask the big boys themselves? What does the music industry say? Here are comments from the senior management in the music industry, all released within the last year:

The world's largest music label is EMI. Its Senior VP of Digital Distribution, Ted Cohen says "Mobile phone will become the digital music player of choice" 

Another of the big four global music labels, Sony BMG SVP of Digital Business JJ Rosen explains why this will happen as he says "Everyone likes music, and everyone has a cell phone"

Universal Music is the third of the four. Universal Music's General Manager Rio Caraeff explains why music on mobiles: "Music is inherently mobile and something you enjoy on the go"

And finally the fourth of the big labels, Warner Music CEO Edgar Bronfman states where the focus will be: "Wireless will become the most formidable music platform on the planet"

After we've reported the trend from stand-alone MP3 players to musicphones, and arguing from the analogy of the PDA wars and the digital camera wars, now the first major analysts are also committing to this future. Yankee Group and Strategy Analytics have both come out now in June of 2006 stating that the battle will definitely be won by the musicphone.

No expert is committing to an unpredecented dramatic sudden Apple recovery. No expert believes Apple could ever come back from this total thrashing it received in the first half of 2006. The game is truly over.

Epitaph for the iPod

The iPod. It was the technology darling. Alan and I both love Apple and totally adored the iPod for all it brought us and the industry.

When the portable music player market was deemed dead in 2001 - Walkman cassette players and portable CD players had supposedly "saturated" the market, and whatever little growth was seen, global giants like Sony were pushing the minidisk as the evolution to the Walkman experience. Nobody believed in MP3 players.

In 2001 Apple had the vision to launch the iPod. A company not known for a consumer music brand, but rather a geeky and proprietary PC brand, nonetheless Apple released its iPod. And most bravely of all, at a time when the whole music industry was in panic about the napsterization and illegal file-sharing of digital MP3 files, Apple collected the industry together for the revolutionary iTunes.

We applaud all that. Like we wrote in our book Communities Dominate Brands as one of the 13 case studies, Apple was brave, visionary, bold and successful in creating a new market space with the iPod and iTunes. They were brilliant.

As they now report Macintosh PC sales growth, the iPod has brought a lot of additional sales to Apple in another market that was said to be stagnant - the PC sales. Apple has been able to create a niche market almost all to itself for nearly 5 years, and in that process added sales to its main product - PCs - all along also increasing its profit margins very strongly.

Brilliant strategy Apple. We applaud you.

But we also have to face reality. Apple had the MP3 player market almost exclusively to itself - with essentially only Creative Labs and a few other small IT players on the stand-alone MP3 player market. That all changed in 2005 when the big phone makers decided to launch musicphones.

The final battle was as brutal as it was brief. Apple lost out in the first half of 2006. What was the ultimate darling of the IT industry, was coldly sweeped to the sideheap of history. The iPod market share this year is about 14% and dropping. Like the Financial Times quoted me August 30 of 2005 in the story about music phones fighting against the iPod, "Next year the game will be totally over," says Mr Ahonen.

The iPod is dead. Long live the iPod.

UPDATE 2 - I've blogged a rebuttal blog answering the first 32 people commenting on this story. Please see [Stampeded by Mac Fanatics]

UPDATE 3 - The story received very broad coverage by several dozen blogsites, websites, news aggregators and discussion groups. This blog has been called excellent as well as the worst writing of all time. I've collected the commentary to this posting [Electronic Echoes]

Comments

[natcire]

Personally, I have a Mot Razr v3, Razr v3x, Samsung D600 and a Mot v330, all GSM on T-Mobile (I only use one at a time). Though I do not own an iPod. Thought I would use my phones for music, camera and video. After the initial excitement of the new phone wears off I use my phone for calling only. Not even for email, sharing pictures etc.

The Samsung D600 had fantastic sound. But it is a phone...I have had cell phones since 1991 and that is what I think of them. But younger people, tweens and teenagers may think otherwise.

The cell phones with MP3 player, camera, videos etc is a way of the handset manufacturers to get the users to buy and upgrade the handsets: more features. This discussion is just akin to the PC that is capable of DVD, music and TV but very few people now use the PC for their only entertainment center.

I think there is a market for cell phones with MP3 capabilities. It is like cell phones with cameras and video...after the first month the novelty wears off and I stopped using it.

Would I take my cell phone jogging? No. Would I take an iPod joggging or exercising (if I had one)? Yes. So that is why I think the iPod will live on.

But that is not Tomi's discussion. Tomi's discussion is that Apple is bad investmeent and that iPod is not viable. That the smart cell phones will displace the iPods. To that, I say to Tomi, "no product stays constant forever." Apple will keep innovating. Look how far it has brought the Mac computers. Look for the next gen iPod and for iPods that can make phone calls! Or iPods that will be PDAs! They may infringe into the cell phone markets!

[Nick]

I'd guess the "seasonal downturn" came from the fact that Apple has not launched a new player...

They launched the 4Gb Mini in January 2004, which will have kept the sales up for Q1 2004. In July 2004, they launched the 4G version of the original iPod - guess what that did for the Q3 sales?

In January 2005 they launched the Shuffle and February the second generation of the Mini.

The last iPod to have been released to date is the 5G version of the original, way back in October 2005. Given that (from these figures) the launch of a new iPod variant always causes a rise in sales, the 2004 and 2005 Q1 sales are probably seasonal dips being hidden by the new product launches.

The big spike for Q4 2005? That's the first time you've seen the new product launch sales combined with the seasonal uplift from Christmas. As I noted earlier, there was no January/February product launch to buoy-up the Q1 figures.

It *is* possible that the music phone will cause the death of the iPod, but at the moment the only conclusion you can reasonably reach is that Apple have not launched a new player and they are running out of people to sell the old ones to (a.k.a. Saturation).

As for Minolta-Konica pulling out of the camera market, it's more likely that this was because: a) They arrived late to the game with unspectacular products and b) stayed in the low-sales & low-margin area of the market for the higher-spec consumer products. Their products, whilst perfectly servicable, were neither aspirational nor competatively priced.

[Tomi T Ahonen]

Hi natcire and Nick

First, I hope you noticed there were two follow-up postings by me about the issue when it was "hot" last month, and a final review of the coverage the issue got in the various blogsites etc.

Natrice - We agree for the most part, Alan and I have repeatedly said that the youth are the digital natives, for them their ultimate gadget is their cellphone and anything they can get onto their phones, they will "play with" and make use of. And no, they are not limited to that device, the new Generation-C (for Community Generation) is competent at multitasking on multiple simultaneous networks and connections, so they will also play multplayer games, use IM Instant Messaging sessions, etc. But their gadget of choice is the cellphone.

I would put it to you, natcire, that once people discover they have this multipurpose device in their pockets, they can rapidly learn new ways of using them. For example. I don't mean we take the cameraphone to take portait pictures of the high school class. But since we have the cameraphone with us, I've heard of several people who use it to take pictures of their car where they park - and/or take pictures of the license plates of the cars parked next to them (in case there is a scratch on the door) or for example taking pictures of the rental car scratches before you drive off in it. All cases where the cameraphone gives us exceptional convenience, but these pictures are not intended to be sent via the network - nor printed. They are temporary memories intended to be discarded when no longer needed.

A good example is young adult women in the UK. There are always horror stories in the press a couple of times per year, of an unlicensed taxicab driver raping some woman passenger over the weekend. Now it is common for the young women to snap pictures of their drivers before they get into the cab. It gives them the confidence to get into a strangers' cab, and the woman knows she has enough time if he starts to behave weirdly, to send the picture to their best mate - if that were to happen.

It doesn't mean, that sometimes, we may spot the perfect image (wow, there is a pub with the name of my wife's maiden name - lets take a picture) and then the only camera we have is that on the phone. Even if of modest resolution, this is the memory we snap. And then the cameraphone is the only phone we had, this is the picture we take.

But much more the the usage of the cameraphone is for new things that we do with the camera being upon our person. I personally take pictures of the subway maps in strange cities. I will always have it on the phone, don't have to worry about carrying the leaflet maps, and I delete it when I leave the country..

Now - about Apple. Here you misunderstood us, natcire. We never - ANYWHERE - in the lentghy postings and replies - said anything about Apple the company being a good or bad investment. If you were to ask me, I'd say Apple has been brilliant in the PC game, and so far has been excellent in creating the marketspace for new portable musicplayers (we had Walkmans and portable CD players) around the MP3 standards. But Apple has now lost what was an effective monopoly.

We have repeatedly said that Apple will continue to sell iPods. And profitably. Only that their market lead is gone. There is nothing wrong with being a niche market and making healthy profits in that.

So please don't assume we think Apple is in trouble. This is not a site about financial performance of corporations, it is a site about digital convergence and digital community power. The iPod and iTunes were brilliant market innovations five years ago, now their age of controlling that market is gone. That is all. Certainly Apple will continue to derive lots of revenues and profits from them for a long time. And if the (Apple/2/Lisa/) Macintosh evolution of the PC heritage of Apple is any guide, the iPod will keep innovating and maintaining a very loyal passionate user base, at the high end of the scale.

Nick - fine, I hear you. So the previous January-March quarter performance by iPods was due to new launches, and this year there was none. So far so good.

If you want to hold onto the seasonality argument - then it must happen that iPod sales reach - AND EXCEED - the level of iPod sales last year? So what now has to happen in the third and fourth quarters of 2006 is a dramatic upturn in sales, to grow very strongly so as to EXCEED the level of the record sales in the fourth quarter of 2005.

I will grant you that theoretically that can happen. If that happens, that total sales in the fourth quarter this year are well above those of last year - then seasonality can be said to have occurred. Fine. I have said elsewhere in the discussions, that I am fully willing to return to this topic, and celebrate Apple's revival, if that were to happen. You do recognize it means fourth quarter sales well in excess of 14.1 million units, when currently they sell 8.1 million. This inspite of the ever better musicphones.

But yes, if the second half now compensates for the serious downturn (46% drop over two quarters) then yes it can be explained as a seasonal variance.

It does not detract from a catastrophic loss of market share. Like Detroit car makers in 1974 and 1979, when they held over 75% of the total American car market, and were not prepared for the sudden shift in market tastes to smaller gasoline-efficient cars from Asia, they lost their market lead and emerged in the early 1980s with only half of the market, and all US car makers with lots overstocked with cars nobody wanted, and the manufacturers massively in the red, while their Asian rivals were making record profits and could not make cars fast enough for the American market.

We have seen that kind of shift. EVEN if Apple were to post a dramatic return to form, and somehow say sell 50 million iPods this year (would an excellent growth record especially for the second half of the year) - they would still have only one SIXTH of the total portable MP3 player market as the phone industry now expects to ship about 250 million MP3 player equipped musicphones this year. But yes, if that reversal happens, I'll grant you that, and I promise to blog about it.

Thanks for writing!

Tomi :-)

[Håkan]

Fascination blog, but what's even more fascinating are the negative responses given. The writing are so clearly on the wall.

Some have responded that a do-it-all device do most things poorly - and that is correct. Is this a valid criticism? Not really. Let me explain why.

The mobile phone seem to have found it's natural size at roughly 60-100 grams and 8-10 cm in height. Make them smaller and the keys will be to small to be really useful, it could easily be lost etc. Compare this to laptops that seem to have found their size at roughly 5-7 pounds and with 14-15 inch screen. Of course exceptions exist but I dare to claim that three quarter of all laptops sold fit in this category. Not because they couldn't be made smaller and lighter (as my X40 proves) but because people doesn't want to sacrifice performance, battery life or screen real estate in search for a thinner, lighter laptop.

Add to this storage saturation. Roughly two thirds of all iPods sold are Shuffle or Nano/Mini. This tells us that two thirds of buyers are happy with 512MB-4GB of storage. A 4GB SD flash memory card can be had for $60 these days, compare this to the $250 Apple ask for a 4GB iPod Nano. A mobile phone is needed to utilise the flash card - but as shown earlier everyone has a mobile phone anyway.

So storage is not a problem. And if it were, flash memory seem to be growing by the minute and soon (three years?) [email protected] dollar will be [email protected] dollar and ready to replace even the harddrive-based iPod. Most people have much less music than that stored.

Is a mobile phone fit as a real camera replacement? No, the tiny lens and lack of optical zoom (hurdles that can't be overcome in todays small phones) prevents that. But of course a phone with camera can replace a normal camera in many situations.

But we're talking about mp3-players, not cameras. Is a phone fit as a iPod/Mp3-replacement? Yes, very well. They already have a display fit for displaying text, a battery with enough capacity for many hours of music playback and enough room to fit a decent DAC. The keypad even makes it easy to search for music, should such a feature be implemented in a phone. A phone also brings many other advantages, like always access to the operator and his services and bluetooth, for easy sharing of music among other phones. Belive me, I live in Sweden (the very stronghold of SE and their Walkman phones) and I see this sharing happen all the time.

And more important, we always bring our phone with us.

Where does it leave us?
1: The nano will face fierce competion from the phone manufacturers. And lose I dare to claim.
2: The Shuffle may survive as a fitness companion but lose its position as the standard player people bring with them.
3: The normal Ipod will stand tall for at least 1 more year, but 3-4 year from now with flash memory hitting 16-32 gig for a hundred dollar or so it will be doomed.
4: A video Ipod with a larger screen may also stand tall since a mobile phone may be fit for music but not as a movie player since the screen is to small and battery life would be to limited.

Tomi, great blog. You should also feel proud over the long, detailed and polite answers you have given to the comments.

/Håkan

[Aaron]

I'd just like to point out that you appear to be missing one fact about the MP3 player/MP3 playing phone "war": people will buy cell phones much more than they will every buy a standalone MP3 player, because cell phones have become a necessary part of life, while MP3 players are and always will be add-ons. And, if people are buying cell phones, why not buy one that plays music? What you aren't realizing is that MP3 playing cell phones do not take up market share from the iPod, because the iPod is a high capacity MP3 player, while the largest you can really get a MP3 cell phone is around 2 GB. Many people who buy MP3 enabled cell phones also have iPods, and use their iPod more often than their cell phone to listen to music, because the iPod has a more user-friendly interface, with the possible exception of LG's Chocolate.

[Tomi T Ahonen]

Hi Hakan and Aaron

Thanks Hakan! We agree :-)

Aaron - we mostly agree, but just so you know, two years ago Samsung released the first mobile phone with more storage than an iPod Nano ie 5 GB. Today there are several top-end phones that store up to 6 GB internally, and also most top-end phones take removable storage memory chips which runs currently up to 2 GB, with 4G expected to ship before the end of the year.

Thanks for writing

Tomi Ahonen :-)

[John]

14 percent of crash would surely cause a big loss to the industery.

[Tobias]

Wow. Obviously I've gotten to this article late, but it was never the less a really interesting read. I've always broken out the MP3 phones and MP3 players into different categories, but obviously that can't be the case any more. Apple knew, or seemed to know at the time, that their competition wasn't Microsoft's Zune, but instead it was Nokia and LG. The decline in market share is understandable given the fact that people only have a certain pool of money to purchase an MP3 or cell phone with and having the opportunity to purchase a single device that has both functions has to have an effect.
Being a life long Apple geek and owner of the original iPod and a 1G Nano, I do love Apple's form factor and user interface. But Apple has to battle for every inch and I don't think they are delusional about their "market share". Yet, they know when to present the best numbers to fit their interests.
Thanks, a really good article.

[Tomi T Ahonen]

Hi John and Tobias

Thanks for visiting

John - am not sure of your point, but thanks for commenting.

Tobias - Thanks. Yes, Apple was quite cagey - now with the clarity of hindsight - to keep the focuss off the phone side until they were ready to launch the iPhone, and also that the iPhone obviously was timed to be launched after the Christmas peak sale period for the iPod, not to cut into that significant revenue stream in 2006. But yes, Apple has clearly known for a long while that this was the case, and also that their strategic future is inevitably linked to the success of the iPhone (not the iPod).

Thanks for writing

Tomi Ahonen :-)

[LOL]

LOL, this is among the funniest and most idiotic stuff I've read this couple years. Yes the MP3 capable mobile phones are growing, nowadays almost every single budget mobile phone has MP3 playing capability, the thing is, you almost CANNOT buy a mobile phone without MP3 playing capaibility nowadays, but it'd be simply ridiculous to count them as any threat to the MP3 player market, since 99.99999...% of those who buy a Nokia 6070 don't use them to listen to music. And according to a survey in Europe, only around 50% of those who buy W800i, the WALKMAN phone, use it to listen to music, the other 50% only use it as a regular phone.

So for this article to mean anything, first it needs to be clear what their "MP3 playing music phone" means, do they count Motorola V3 and Nokia 6070 as "MP3 playing phones"? It says Nokia sold 40 million music phones in 2005, but in 2005 Nokia hasn't produced one single XpressMusic phone yet, so I guess they count some budget MP3 capable phones with 5MB internal memory and no memory card extension ability as "MP3 playing music phones" too.

And secondly how many really use their "MP3 playing music phone" as a MP3 player? You can't boast that the MP3 player market have 56 million units when only 12 million something are actually used to listen to music, while to other 40 million something are just used to have MP3 ringtone and used as regular mobile phone.

So in the end, as far as we know, Apple still dominates the MP3 player market, as long as we logically define "MP3 player market" as to exclude those music phones not used to listen to music, not to mention those "MP3 capable phones" that have less than 10M total memory.

[Tomi Ahonen]

Dear LOL,

Thank you for writing. Our postings on this topic were not intended in the least bit as a parody or humour. The story is also no longer "idiotic" as you suggest. You are referring to an old posting from a almost year ago, part of an ongoing discussion dating to 2005 consisting of four major commentaries.

We concluded that story early this year (2007) when the final 2006 iPod sales numbers were released, shortly after the iPhone was announced. Please read that posting to see more (Requiem for a Heavyweight)

But in short - all you claim in your comment here, LOL, that we are somehow idiotic - are in fact now verified not only independently by the Financial Times, Newsweek, Barrons, Wall Street Journal, Economist, etc; and by ALL leading industry analysts from Informa (the source used by Apple) on down.

The fact that MP3 playing musicphones form the same market as the iPod was implicitly confirmed by Steve Jobs at the iPhone launch, and explicitly confirmed by Apple CFO Steve Oppenheimer.

I have nothing more to add to this story. If Apple itself clearly states this is the same market - and in their GLOBAL market share (ie not the USA market share of near 80%) - Apple admits their global market share is in near single digits - then we have nothing more to discuss on this matter.

it is YOU who is funny about this. You have stuck your head in the sand. ALL surveys around the world show that more people listen to music on musicphones - in 2006 - and that musicphones outsold iPods during 2006 by 7 to 1. This year its even more so.

Sorry, LOL. You are mistaken. Please wake up, read the updates to the story, verify the independent sources and Apple sources and music industry sources quoted - IFPI for example says that in South Korea alone, over half of all music sold - not half of digital music, half of ALL music sold - goes directly to musicphones. Meanwhile in America - the best market for the iPod - only 10% of all music goes to web music services, and iTunes is only a part of that (meaning less than 10% is iTunes)

Sorry LOL, you are so wrong, so out of date, it is not even funny. It is amazing to see how many people simply refuse to face reality. Like we wrote earlier this year, after Apple itself admitted this market, the story was closed to us. Perhaps some day you LOL will also wake up to the real world

But thank you for writing.

Tomi Ahonen :-)

[bobie]

this one may be useful for you

http://www.hutwitina.com

[sandeep]

There are many ipod nano movies sites out there in the market but you may be wondering which are the ones that score well in terms of usability, pricing, etc.

[pradeep]

It’s called common sense. Something that I guess people these days have forgotten. Naturally if you are going to blast your iPod in your ears at full volume you will have hearing problems. If you can’t control the volume then you shouldn’t own any kind of stereo equipment at all because they can all damage your ears easily. Apple or any company cannot be your baby sitter for what you do with your equipment every second of the day.

[suresh]

AMAZING. My ipod just stopped working a few weekes ago. The hard dreive wouldn’t “turn over”. I could hear it clicking and see he apple logo flashing on but no sad face or anything. I was sad. I don’t want to spend $$for a new ipod.

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[kdt]

"I promise you. I PROMISE you. I will be back if the Apple numbers for the iPod show ANY increase of any level from the sales of 8.1 million iPods in the second quarter of 2006. I have told you in the original posting and my replies - that both Alan Moore and I love Apple the company, Macintosh the computer, iPod the MP3 player, iTunes the music store. I love them. If there is good news to report, I WILL. I promise you that."

Well let's see...

3rd Quarter 2006 - 8,111,000
4th Quarter 2006 - 8,729,000
1st Quarter 2007 - 21,066,000
2nd Quarter 2007 - 10,549,000
3rd Quarter 2007 - 9,815,000

When the author said that iPod sales never dropped after the first quarter (which includes the Christmas season), he failed to realize that sales didn't even hit 1 million a quarter until 4th quarter 2004. The iPod is now like any other consumer electronic device where you will see a spike in sales during the Christmas season.

[kdt]

Are you including all music playing cell phones? If so, then you are including phones like my Samsung A900 sold by Sprint with a whopping 56MB of available memory and no ability for expansion. Do you seriously think people are using this phone to play music?

[Tomi T Ahonen]

kdt - thank you for posting (two comments)

First, as I promised - I DID return to the iPod story one last time after the Christmas quarter 2006 numbers had been released. The game is over, iPod's reign is over, by then musicphones outsold iPods over 6 to 1 and I said we won't return to kick this dead horse story unless something dramatic happens.

Obviously that Apple had announced the iPhone two weeks prior to the iPod numbers being released, pretty much made it an academic matter by late January 2007.

Today musicphones keep GROWING their sales while again Apple iPod sales fell after Christmas, today musicphones outsell iPods at more than 8 to one.

YOu complain about your Samsung by Sprint. Its so sad you Americans have such lousy phones and lousy carriers. The rest of the world has moved so far beyond this. Globally, HALF of all who own a musicphone now listen to music on them. It does not mean that the iPod vanishes, as iPods will outpeform even the top musicphones for a pure music experience. But for the mass market it does not need to be excellent, it needs to be good enough. In Europe and Asia most musicphones have removable memory chip slots, so you can easily store 2 GB of music now, and 4 GB before Christmas, on removable media. Thats a pretty serious iPod already by capacity.

And yes, I've never said musicphones were better for LISTENING to music. But I've also consistently said that musicphones TOTALLY dominate in music experience - having over a DOZEN music experiences you cannot have on your basic iPod today.

The iPod was a brilliant invention. It has now found its natural annual sales levels, evening off at about 50 million units per year. That is very good news for a company called Apple. But among portable musicplayers, the market this year is over 500 million units and obviously its Nokia, SonyEricsson, Motorola, Samsung and LG who all will outsell the Apple brand in portable music players, as they all will feature a rich catalog of musicphones.

Game has been over since 2006.

But thank you for writing.

Tomi Ahonen :-)

[kdt]

Wow, what a quick response -- I'm seriously impressed

But you didn't answer the question, do you count all phones that are theoretically capable of playing music in your assessment? Surely you must agree that not all users of mp3 playing cell phones are using them for playing music either because of usability or a fear of running down their battery. Also, wouldn't you think that most iPod owners also own cell phones?

I've been scouring the net but the best reference I could find was

http://www.comscore.com/press/release.asp?press=1184

showing that only between 8% and 20% of cell phone buyers, depending on age group, care about a cell phone's ability to play mp3's.