Predicting Apple's New iPods: Evolutionary, But iPhone Inspired

| About: Apple Inc. (AAPL)

By Carl Howe

As September looms, rumors abound on what's going to be in Apple (NASDAQ:AAPL) stores for 2007 holiday shopping. So I thought I'd take a whack on what the marketing -- not technology -- criteria are for Apple's upcoming refresh of the iPod line to power Apple's holiday sales.

One of the challenges facing the iPod this holiday season is that this will be its sixth year in the consumer market. Worse, the iPhone has stolen a lot of the iPod thunder over the last year, while the iPod has not had a significant redesign since 2005. So what does Apple have to do to create iPod excitement this holiday season? Apple's new design must:

  • Bolster the music and video experience for iPod owners. First and foremost, the iPod experience must center on music and video, not communication as the iPhone does. That means a rugged device, long battery life, great displays, and excellent audio.
  • Differentiate iPod from iPhone. Consumers shouldn't be confused about whether they should spend $249 for a video iPod or $499 for an iPhone. The value of each product should be clearly defined and clearly different.
  • Continue delivering iPods traditionally strong margins. While it's tempting to consider just selling an iPhone without the cell phone radios as an iPod, the profits on such a product would be insufficient to satisfy Apple's business goals. Dropping the parts for GSM would save Apple only $25 in parts cost out of a total of $230 in iPhone parts. The parts cost needs to be more in the range of $100 for a video iPod and $75 for an iPod nano equivalent for those products to be successes for Apple's business.
  • So what types of designs would meet these criteria? Here are my takes on what we'll see in a September special event for an iPod refresh:

  • A wide-screen video iPod. Apple's new video iPod will still rely on disk storage in 80 and 160 GByte capacities, but will gain the iPhone's high-resolution screen and touch panel interface. I do not believe that Apple will add WiFi wireless networking to these iPods, choosing instead to keep the functions simple to understand and the interface simple, while providing music and video lovers with storage far beyond that available on an iPhone. These features will set the prices of the high-end of the iPod line at $299 and $349.
  • iPod nanos with video support. The iPod nanos will look much like smaller versions of the video iPods, with displays across more (but not all) of their bodies. But these iPods will only sport flash storage in 4 and 8 GByte sizes, and their screens will be considerably smaller than the video iPod. I further expect these nanos to retain the touch wheel of today's iPod nanos to keep costs down and to retain one-handed operation, a key attribute for many iPod users. Price points here will range from $149 to $249, just as today.
  • More storage in the iPod shuffle. The low end of the iPod line will continue to eschew displays, focusing instead on delivering more storage to accommodate large iTunes plus songs. Expect the iPod shuffles to now sport 2 GBytes of storage for $79.
  • My view is that Apple's updated iPod product line largely matches that of today, just with slightly better feature sets and better user experiences. Further, pricing remains relatively constant as well, with prices actually rising slightly at the high end to accommodate trickle-down demand from the iPhone. iPods would remain clearly differentiated from the iPhone, yet would provide many of the same benefits.

    I don't have any inside line on what Apple is actually planning here, but I do know Apple is a savvy marketer. This product lineup introduces iPhone technology into the iPod line without requiring Apple to significantly change its iPod marketing or positioning. The iPod update I've proposed is simply an evolutionary update, while the iPhone was a revolutionary introduction. But when you're running a $25 billion business, one revolution a year is probably enough.