iPhone: ‘Cannibalistic’ of iPod

Analyst says Apple iPod sales could face a rival close to home.
November 24, 2006

Apple Computer, increasingly under siege from rivals seeking a slice of the iPod’s multibillion-dollar digital music action, may soon have an unexpected rival: itself.



The Cupertino, California-based Mac maker is widely expected to announce an iPhone, an event some analysts have said could come as early as January at Macworld (see Two Apple iPhones Coming).



Most industry experts have focused on the possibility of two phones coming, a smart phone and a slimmer iPod nano-like phone, but have so far not taken bold stances on the possible effect on iPod sales (see Apple iPhone to iChat).



“We believe the iPhone will be largely cannibalistic rather than incremental to the iPod franchise,” Bernstein Research analyst Toni Sacconaghi wrote Wednesday in a report.



Bernstein Research also pointed out that Apple’s iPod, which has fueled the company’s resurgence, will likely see a decline in its 70 percent position in the market as competitors move into the lucrative market for portable media players.



‘We believe the iPhone will be largely cannibalistic rather than incremental to the iPod franchise.’

-Toni Sacconaghi,

Bernstein Research



Microsoft, for one, has entered the iPod market, pledging to commit hundreds of millions of dollars in a multiyear effort to break into the business, much as it has done with Xbox in game consoles (see Zune Player Enters iPod Market and Red Hots to Rock the Zune).



Also bad for Apple, Bernstein noted, is a trend toward flash memory-based players and serving the international market. These two areas are ones in which “Apple’s position is relatively weaker,” Mr. Sacconaghi noted.



Apple’s full-year 2006 sales overall totaled $19.3 billion. The Mac maker’s fiscal full-year iPod sales hit $7.67 billion for 2006, representing 40 percent of its business.



In 2006 alone, it sold 39.4 million iPods, an increase of 75 percent over last year’s sales.



Apple’s iPod revenue growth pace, however, is seen as slowing. For full-year 2007, it’s expected to reach $8.7 billion in iPod sales, and in full-year 2008 it’s expected to make it to $10 billion. Rocketing sales have brought a number of recent copycats of its success in melding iTunes to iPod.



Microsoft Calling

The most recent example is Microsoft’s Zune, paired with its Zune Marketplace music service that offers over 2 million songs. Also, Nokia has jumped into the action with pumped-up Nseries music-playing phones and the launch of its Music Recommenders digital music service.



Microsoft has not ruled out entering the cell phone market either. In September, the Redmond giant indicated at a press event that its Zune player could be a contender (see Microsoft: Zune Phone?).



Most are doubtful the software giant will experience the kind of success that Apple has enjoyed with iTunes. But Apple’s iTunes grip on people’s music player choice may not be as tight as conventionally thought, the Bernstein analyst noted.



“The ‘lock-in’ effect of iTunes and Apple’s FairPlay digital rights management system is weaker than many people think,” wrote Mr. Sacconaghi.



Shares of Apple rose $1.32 to $91.63 in recent trading.



Premium Apples

More challenging is that Apple wares are typically positioned as premium products against their more commoditized rivals. That strategy could spell trouble in the highly subsidized cell phone market where low-cost phones rule.



The analyst noted that Apple will likely target the $300-plus segment of the handset market, which represents only 5 percent of units sold.



Also, the world’s largest phone maker, Nokia, and No. 2 Motorola have already got a considerable grip on the phone market and have a significant lead time in efforts in music-playing phones.



Bernstein Research expects the portable media player market overall to slow in the next two to three years, going from 48 percent in 2006 to 22 percent in 2008 and to 16 percent in 2009.

Contact the writer: SMartin@RedHerring.com

Article found at: RedHerring.com