A $100 iPod?

The chattering about a $100 iPod that have been bouncing around the net since just before Christmas has made it into the “mainstream press” (if you can call msnbc “mainstream”).

As near as I can tell the original rumor was that Apple would be releasing a $200 iPod, likely based on a smaller hard disk form factor, with the expectation that the price will drift down towards $100 over the course of the year.

There is lots of analysis and speculation, some more thoughtful than others, about what is really going to happen. I’m going to add my own voice to the babble.

I am going to predict that Apple will indeed release an iPod in the $200 range. There are lots of geniuses explaining that this would be a foolish thing for Apple to do right now, since Apple seems to have no trouble selling all the iPods they can make at the current price points, but such people are idiots.

Yes, releasing a newer cheaper iPod might undermine the existing iPod product line, but if Apple isn’t willing to take such a step, plenty of others are. Not that price/capacity is the only metric (style, user experience & brand count for something in consumer electronics), but to give just one example, Dell is selling more capacity for less money, and plenty of others are following suit.

Even without close competitors, technology trends are working against Apple’s existing pricing model. Apple is already at the point where their low end model will accomodate the entire music collections of most users. Before the end of the year, their high-end model will likely hold 20,000 songs, which is somewhere in the neighborhood of 2,000 albums, or 2 months of continuous music.

Apple can add features — An FM radio would probably have broad appeal, and quality stereo recording capability would find a niche — but such additions aren’t likely to support their pricing structure for long (since upstart competitors already include them). Video can drive the demand for storage, but its a much smaller niche — people can and often do listen to media for most of their waking hours, video is generally only consumed a few hours a day. Making it portable might mean that some people (public transport commuters, etc) add another hour or so of video consumption to their day, but it just isn’t going to be the same sort of market. Giving people portability for the computing environment is a cool feature, but given the poor state of application and OS support, its probably only going to be a niche feature. Besides, excluding audio files, how much data do most people really have to back-up and carry, 5-10GB?

So, the market for digital audio devices is already in a second wave of disruption (flash vs HDD players, HDD vs smaller/cheaper HDD players), Apple can either jump in and use its superior brand and user experience to grab more of the market by aiming low, or it can chase a dwindling market for high-end devices and ceed the market to Dell and their ilk.

But wait, there is more! Apple doesn’t just sell portable music players, they also sell music. Yes, Apple has said that the iTunes music store isn’t very profitable, but that doesn’t mean much to me at this point. For one thing, its in Apple’s interest to downplay that line of business.

1. Apple has a good story to tell their stockholders: “We make good money on iPods”
2. Apple scares away competitors: Who is going to invest in on-line music distribution if the front-runner isn’t making money on it?
3. Apple increaces its leverage with the music industry: The recording industry has to understand by now that their short and long-term health depends on someone figuring out how to make a profit selling music on line. Apple is the current front-runner and so the music industry has some interest in their success (especially if competitors founder or fail to materialize), hence they may sweeten Apple’s terms to save their own skins.

Other things to consider: Right now, the RIAA estimates that the recording industry is a $13B business in the US. Apple did what, $20M in business in the first 7 months of the iTMS, so lets assume $40M/year. That’s less than 1% of the US music industry! Its not hard to imagine that the profitability picture would change if they captured a larger portion of the market. It’s also not hard to imagine that in the long-run, Apple, by dealing directly with small labels and independant artists could bypass existing labels and win much more favorable terms. These days retailers get roughly 30% of the cost of every cd and distributors get 30%. Contrast that with Apple’s current deal, where they get maybe 10% and the labels/artists get the rest (with the labels getting most of it) .

Nor is it hard to imagine that they will capture a larger portion of the market, especially if they are willing to drop the price of iPods.

Will they go as low as $100? Rio’s Nitrus, which uses a 1.5GB 1″ drive is still $200, but a lot could change in a year. I’ll bet that a $200 iPod isn’t far off and I’ll guess that Apple will introduce a bundle at a sub $200 price point that incudes a significant number of songs (20-50) from iTMS.

All of this is, of course, speculation. I’d like to drill down more into: Estimated hardware and assembly costs of existing iPods, and of smaller HDD form factors, number of iPod owners buying music from iTMS, sales # of iPod’s and other digital audio players vs existing categories (portable CD players, home CD & DVD players, and, perhaps most importantly car audio systems). Perhaps another day.