IPod Effect

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Jay

Kirk Bangstad

In April 2007, Apple celebrated its 100 millionth iPod sale, claiming that it was the fastest selling music player in history. Indeed, after its introduction a little over five years ago, the iPod maintains a 75% share of the MP3 player market, after shipping 8.7 million iPods in its fourth quarter ending last September. This phenomenal growth has not only changed Apple—more than half of its $23 billion revenue comes from iPod sales and iTunes music downloads—but is currently revolutionizing many other industries as well. Anyone who provides content or creates platforms to deliver content are feeling the “iPod/iTunes effect.” Here’s a look at some of what is happening within some of those industries.

iPod Component Manufacturers

Toshiba (TOSBF), Broadcom (BRCM), PortalPlayer and a number of other iPod component manufacturers stand to gain from the iPod/iTunes effect. According to a recent study sponsored by the Sloan Foundation ^[1] and used in a recent NY Times article ^[2], Apple only makes $80 from the sale of a $299 iPod, because Apple outsources the entire iPod manufacturing process and of course has to dole out some retail and distribution dollars. Toshiba apparently collects $73 for installing an iPod's hard drive, and Broadcom/PortalPlayer each collect a portion of $13 for their embedded video/multimedia processor chip ($8) and controller chip ($5), respectively.Poop

MP3/Audio Manufacturers

Even competitors to Apple, like Sony (SNE) and Creative Labs, who both make their own MP3 players, have recently introduced iPod compatible accessories like digital media ports and iPod speakers. By joining other audio manufacturers like Pioneer in integrating with the iPod, these competitors are essentially admitting that if you can’t beat’em, you might as well join ‘em.

Device Manufacturers

MP3 players, mobile phones, and PDAs are converging, making anyone in this space a potential Apple competitor/partner. In general, experts predict that the heavily marketed iPhone, an MP3 player and mobile phone with other bells and whistles, will steal sales from mobile phone manufacturers such as Motorola (MOT) , Nokia (NOK), Samsung, LG among phone manufacturers.

Music Industry

The “iPod/iTunes effect” will ultimately help the music industry, but only after the industry finishes contracting after losing substantial revenue in CD sales.

The major music labels—EMI (LON:EMI), Universal, Sony (SNE), and Warner Music Group (WMG)—are literally being forced to dance to Apple’s iTunes as digital downloading of music continues to erode CD sales. EMI recently made a deal with Apple to offer its entire catalog on iTunes (except for the Beatles catalogue) DRM-free. DRM, or digital rights management, is software that prohibits consumers to share their iTunes music with friends. Experts predict that the other labels will soon follow suit and deal with the enhanced risk of music piracy.

The “iPod/iTunes effect” is forcing music labels to reevaluate their business models. Companies may have to increasingly focus more on single-song sales via online stores like iTunes and understand that selling a CD with 15 songs for $15 a pop may be a relic of the past.

It's very nice to have!!

Live Music Venues/Producers

“The iPod/iTunes effect” on music ultimately hurt music sales by encouraging the purchase of single songs for around $1 instead of multi-track CDs for over $50. This new focus on the “single” could eventually hurt fan loyalty to specific artists because they will no longer be automatically exposed to that artist’s opus of repertoire. Ticket sales for touring artists may suffer along with those companies that produce large musical events such as Live Nation (a 2005 spin-off of Clear Channel Communications (CCU)).

Media

As podcasts become more popular and iPods are increasingly being used to watch video as well as listen to music, traditional broadcasting and print media companies will increasingly lose viewers to new media companies like YouTube that create content easier to digest on a mobile device.

Radio may be the most affected, as consumers can now create gigantic playlists that play the songs they like randomly. Auto manufacturers are building MP3 docks into cars, meaning that along with traditional radio broadcasting companies like Clear Channel, satellite radio companies Sirius and XM) capitalize on drivers looking for ad-free music might also lose momentum to the “iPod/iTunes effect.”

New Media

Mobile content providers, albeit currently a pretty nascent market, should grow as a result of more video-capable iPods being sold. Google’s recent purchase of YouTube has sparked a flurry of interest in new media companies that provide short clips. CBS (CBS) recently purchased Wallstrip, a mobile-based financial content provider. Sony pictures recently introduced “mini-episodes” of old series like “Charlie’s Angels,” “The Facts of Life,” “Fantasy Island” and “Who’s the Boss,” edited from their original lengths of 30 or 60 minutes each to an Internet-friendly 4 to 6 minutes. Look for more “mobile-friendly” content providers to gain steam over the next few years.

Telecom Industry/Wireless Carriers

The “iPod/iTunes effect” will ultimately help wireless carriers like AT&T (T), Verizon Communications (VZ), and Sprint Nextel (S), because MP3 player/mobile phone convergence will increase device usage, along with mobile services to deliver music. With the majority of Americans now using mobile phones, carriers are worrying less about attracting new customers and more about keeping old ones and generating more revenue from them through added services.

In the short term, a consumer will be more inclined to stick with their current carrier if they have all of their songs downloaded onto a phone that only works with that specific carrier. AT&T’s exclusive deal with Apple to provide the wireless service to the new iPhone will definitely generate business for them in the short run until downloaded music is DRM-free.

Apple (AAPL)

It is inherently obvious that Apple’s star is rising, but the “iPod/iTunes effect” has actually helped increased Apple’s personal computer sales over the years.

In 2002, the first full year Apple sold the iPod, Apple accounted for 2.2% of the worldwide PC market and 3.5% of the U.S. market. A new trend emerged in 2004. Apple's worldwide market share continued to drop, dipping under 2.0%. But in the U.S. -- the region where the iPod has been the most popular -- it rose to 3.3%. In 2005, the worldwide figure rose to 2.2% while the U.S. figure jumped to 4%. While the absoulote market share numbers may seem small, overall, Apple shipped 52% more computers in 2005 than it did in 2002.

Experts say that the “iPod/iTunes effect” increased the cache of the Apple brand, thus creating a “halo” effect that boosted sales of Apple products other than the iPod.

Notes

1. ↑ http://pcic.merage.uci.edu/
2. ↑ http://www.nytimes.com/2007/06/28/business/worldbusiness/28scene.html?_r=1&oref=slogin