Why Doesn't Apple Give Away iPods?

The not dead yet Steve Jobs introduced new iPod models Tuesday in San Francisco. Most of the attention was devoted to the new iPod Nano — shaped like the old iPod Mini — with a bigger video screen and more capacity in two models from $149-$199. It did nothing with its iPod Shuffle line, priced at $49-$69.

It’s interesting to compare how far Apple has come since it introduced the first iPod back in 2001:

Model	Original iPod	iPod Nano (4th generation)
Introduction date	Oct. 2001	Sept. 2008
Mass storage	Hard disc	Flash RAM
Capacity	5 gb	8 gb
Height	102 mm	90.7 mm
Width	61.8 mm	38.7 mm
Depth	19.9 mm	6.2 mm
Weight	185 g	36.8 mm
Screen	160x128 b/w	320x240 color
Content	Sideloaded music	Sideloaded music, purchased music and video, rented video, podcasts
Price	$399	$149

This is certainly a good, clear trend line for the pace of electronics miniaturization over those seven years.

However, it does raise the question: when will iPods be free? If Apple is pursuing a razor and razor blade model, why not give away the iPods (or at least an entry-level model)?

A preview article Monday in Forbes noted the declining importance of iPod sales:

Apple's thriving digital content business gives Steve Jobs & Co. plenty of room to slash the price of the iPod to keep digital music and movie sales growing, and to use the company's increasingly powerful digital content business as a way to segue into sales of tablet computers and other gizmos, as it has with the iPhone.

"With iPod price cuts, Apple is choosing revenue over unit cannibalization," Credit Suisse analyst Bill Shope wrote in a research note Monday.

To be sure, Apple's lineup of digital music players could use a boost. IPod sales are up just 7% from the year-ago period. In part, that's just the law of large numbers at work. However, fresh designs, coupled with a price cut, could reignite demand for the stylish gadgets and keep customers rolling into Apple's increasingly lucrative iTunes store.

That's a business with a strong future ahead of it, even as the hardware business that launched it slows. Apple reported that sales of "other music-related products and services"--chiefly iTunes content--jumped 34.7% to $819 million for the quarter ending in June from $608 million during the year-ago period.

So if the trend of iPods is cheaper and a smaller portion of the company’s revenue stream, why not give one away?

As a practical matter, it will probably never happen, because the cross-subsidy is imperfect. The closest thing we have to a perfect cross-subsidy is the videogame console, where Sony or Microsoft or Nintendo capture royalties on every videogame to pay back the subsidized console. Even so, a few hackers figure out how to use an Xbox as a Linux box rather than a royalty stream for Redmond.

To give away an iPod, it would have to be useless except for playing iTunes content, and that’s not likely to happen. The company could sell an iPod for $100 with a $100 iTunes store gift card, but if it wasn’t locked to that iPod then the buyer would just sell the card on the open market. And there’s always the problem of multiple freebies per person, which seems to be why razor blade handles are no longer free.

There’s also the fact that Apple sees itself as a premium brand, and you never cheapen the brand. The closest they’ve come is to give away nearly stale iPods (i.e. a month before they become obsolete) with back-to-school laptop sales, which is more of a bundle than “free.”

Instead, Apple is holding its price points while the rest of the industry commoditizes, and is intent on proving what a good price discriminator it is, squeezing the maximum revenue out of every sale. Moving up from 8gb to 16gb will cost you $50 for an iPod Nano but $70 for an iPod Touch. Is the memory more expensive? No, people will pay more.

Still, the $400 price point became $150 after about 5 years, and I suspect it won't be long that there will be an under $100 device that plays video. So for most teenagers and their parents, under $100 is closed to an impulse buy.

Disclosure: no positions

Comments

[John C. Lee:]

Probably in about 2 years, you might get an iPod for under $100, but people are still willing to pay the sticker, and AAPL knows it.

2008 Sep 11 04:50 AM

[i39gy783jf5:]

The ridiculousness of articles emanating from SA is getting worse and worse.

This one sets a new standard. It's not even worth rebutting or answering, other than to say, buddy, go write about something else.

Perhaps pigs and lipstick?

2008 Sep 11 06:02 AM

[LeStat:]

Every Apple product has a huge profit margin priced in, you never see a sale like Dell or the other PC box makers run.
Plus you have to pay a lot extra just to get a decent warranty, and you'll need it. Macs and iPods look great, but are poorly built.

2008 Sep 11 06:09 AM

[southbeach:]

why sell something people would buy for cash when you could give it away? hmm, let me see.
on a separate note, john titor comments that Microsoft's gaming division is bleeding money. not sure that's accurate - I think they've actually, and surprisingly, made a go of the XBox business (just don't mention the Zune!)

2008 Sep 11 07:14 AM

[Tom B:]

Do some actual RESEARCH before writing articles. Apple DOES give away iPods. I have two friends that got free iPod "Touches" with the purchase of MacBooks. They love them, by the way.

As for handing them out to passersby on the street-- Apple makes more on the iPod hardware than they do on iTunes music sales. Randomly giving away hardware; thus, seems foolish.

2008 Sep 11 08:20 AM

[turnkey:]

iPod Touch Will sell like hot cakes!!!!!!!!!!!!!!

It's the STAR...

Check out the Ad:
www.apple.com/ipodtouc.../

Check out the tryout on Apple's website:
www.apple.com/ipodtouc.../

2008 Sep 11 08:27 AM

[BMWTwisty:]

Geez, you gotta be kidding me. This is a vacuous piece of blogocrap. Why doesn't Dell give away laptops to enhance their desktop sales? Do a component comparison there whydontcha. Look a their prices in 2001 vs now. Dell is a really premium brand, right? You have a weird bit of speculation here. 'why not give one away? ...you never cheapen the brand." Oh, you mean like Dell...? Apple makes good products that more and more people are buying. Apple's economies of scale and value will continue to prevail to determine price points.

2008 Sep 11 08:56 AM

[billp37:]

Sony ICD-UX70 has digital mp3 recorder that can be used to record music, store recorded mp3 files to pc disk, and make cds.

home.comcast.net/~bpayne37/funpics/ban...

Recording can be downloaded to an iPod.

Our son-in-law designed the iPod shuffle analog chip for Sigmatel in Austin - so we received a shuffle for a christmas present several years ago.

I'm trying to find out of the "shuffle" feature can be disabled.

2008 Sep 11 09:39 AM

[brewer:]

Hey Joel,

Apple DID give away an iPod to all education buyers. in fact, there are four days left to get in on the deal. Sweet deal BTW, you get a FREE iPod touch for buying any Apple laptop or iMac. Sales this quarter are going to be off the charts.

2008 Sep 11 09:48 AM

[brewer:]

BTW, almost everyone sees Apple as a premium brand, because they are. Everyone else simply has generic computers. Not everyone is going to agree on anything, but this is about as close as it gets.

2008 Sep 11 09:51 AM

[Shorting Sh...:]

A thesis on the obvious; what a waste of reading time!

2008 Sep 11 09:57 AM

[mollytjm:]

i have several friends who got free ipods earlier this year, with macbook purchases. and to the guy saying apple products are poorly built...geez...they're built better than most things on the market and they back up their products with great, free, tech support, including walk in help at all their stores. apple customers give the highest customer satisfaction of all tech companies for a reason.
and...they not only are built better, but they work a lot better.

2008 Sep 11 10:19 AM

[Major Hooters:]

Well Joel, you did it again, showing us all that a PhD can still be just as much an idiot as anyone else, thanks for the community self esteem boost. Honestly, where do you get your ideas? And why are you allowed to write? Geez, I know HS kids who have more insight than you. I'm sorry, I really don't mean to be rude, but your "intellect" is just astounding. Every time I read one of your articles I am amazed of the lack luster quality. I can only hope this isn't your only source of income.

2008 Sep 11 10:39 AM

[.crazylegs..:]

IS this guy serious? Apple's STATED strategy is to use the content store to sell iPods, not the other way around. They run the store at break even and make all the money on the hardware.

2008 Sep 11 10:40 AM

[ConversionC...:]

Weight 185 g 36.8 mm
----------------------...
How many mm in an ounce?

2008 Sep 11 11:01 AM

[spinetta:]

Oh, puh-leeze! Dot com bubble mentality is sooooooo ten years ago. Should strawberry farmers give away blenders to encourage smoothie consumption? Should Ben and Jerry give away bowls, spoons, or cones? Has anyone ever proposed that HBO give away television sets? Here's a clue: Only a fool cloistered in his ivory tower would suggest that a product with such rapid acceptance should be sold at a loss. Furthermore, the iPod's utility extends beyond music storage and playback. This Macintosh user stores encrypted backups of all his digital files on an iPod. Prior to the advent of the iPhone, an iPod was this user's portable calendar and contact book, and it's still easier (IMHO, YMMV) to use an iPod for those tasks that a cellular phone. Sometimes, PhD really does stand for "piled high and deep".

2008 Sep 11 11:36 AM

[The Loomer:]

I think the mistake in this article, which essentially renders the premise meaningless, is that there are iPods at every price point. While the Nano holds down the $149-199 price, there are still iPods at $249-399. And, of course, $49 and 69. So while the nanos are becoming smaller and cheaper, like all tech does and will, Apple is using the entire product line as a barometer for music enthusiasts who will pay anywhere from $49 to $399 for a music player. If you gave them away, any model, even the cheapest, you really would have cannibalization. People might pay $50 for your cool thing, but they will definitely take it for free. So Apple is setting up a value proposition that will profit them at all ends of the spectrum. And it's working, because market share is 70%, they're making big money and growing, and their competitors are burning dollars in the market with zero traction. The biggest, most profitable iPod of them all, by the way, fetches $500-600 for Apple. That's the iPhone, which costs $199-299, and garners a $300 premium from AT&T to boot. So Apple, in fact, has expanded the product line, and managed to raise its top-level premium cost for their "mature" iPod music product by adding a phone to it. As well as having a size and flavor for every level of consumer. I think that's just smart. Plus, it's hardware, and it costs money to make 'em, so you can't give it away. Apple is selling 12,000,000 iPods a year, and growing, if you count this year's 3-4 million iPhones which are tracked completely separate from that number. If Apple keeps iPod sales constant, and adds revenue from iPhone, they grow their revenue approximately $2 billion (16-20% iPod revenue growth) by adding a single product to the line, whose only real distinguishing features are having cell reception, and GPS. So think of all of iPods as one product line, with varying value propositions, and you realize that it's not a razor and blade model. It's a play to take the lead in the PC Universe, where Apple has 70+% market share. From here, Apple is using these devices to rapidly grow market share in the phone and PC markets, where there are many, many more billions at stake. They don't have to give iPods away because people like them so much, they'll buy them, and then buy more -- a Mac, a phone, accessories. Goldmine!!! This is the genius of the iPod, the genius of Steve Jobs and Co., and the reason why Apple is taking over the technology market. The stock, by the way, is presently undervalued by $50 on current earnings and growth, not to mention forward projections. There's $2 billion worth of iPhones not even factored into this coming quarter's earnings. It's free money, printed for you, by Apple, in an economic slump. Come and get it!

2008 Sep 11 11:48 AM

[tuskagee:]

Too ridiculous to comment on. Where, oh where, does one begin?

This guy just loves to be pilloried in public...I've seen previous 'writings'.

How sad for him.

Surprised he doesn't advocate free macs and $3,000 iPods...

2008 Sep 11 06:41 PM

[KenC:]

The author makes some good points, why Apple doesn't give away iPods, but I think the author doesn't quite understand that Apple has reversed the razor and razorblade metaphor. The classic understanding would be to give away the razor to stimulate blade sales. Apple doesn't. It gives away the blades to stimulate razor sales. In this case, Apple gives the music and other media away for a pittance in profit to make it up on ipod sales with healthy gross margins.

2008 Sep 11 07:02 PM

[steveballmer:]

Shhhhhh!

2008 Sep 13 01:54 PM