Apple: Time For iPad SuperMini And Killing The iPod

| About: Apple Inc. (AAPL)


The iPod product line should be killed.

Making the iPod Touch into an iPad will increase sales.

All iPod functionality should be migrated to iOS.

The iPod Touch is being buried in the ever decreasing iPod numbers. For many quarters, in the analyst conference call, the iPod Touch was singled out as generating over half the iPod unit sales. It has helped the cannibalization of iPods and moved people towards the world of iOS, iPhones and iPads but the whole iPod range did not even generate $1B revenue in the last holiday quarter, when revenue dropped by 55% YOY and units sold by 52%. The line in Apple's (NASDAQ:AAPL) accounts is there for historical reasons. It is no longer worth Apple's time and effort to continue iPod redesigns and marketing for what is likely to be, $2B to $2.5B in revenue in FY2014. The iPod helped reestablish Apple as a consumer electronics force and the iPod Shuffle is arguably the most successful wearable to date but it is time to kill the iPod product line and reallocate the functionality and resources into products which have a future.

So let the iPod Touch come out of the closet and be recognized as a true iPad. Rename it, for example, the iPad SuperMini. It already has a 4 inch Retina screen. Maybe with some minor upgrades to help justify the SuperMini tag. Use the A6 chip (or even an A7 for 64bit compatibility) instead of the A5 and move to the 8 megapixel camera from the current 5. Both of these could come from the iPhone 5c, making suppliers happier and letting Apple push them on decreasing the component prices. To keep the price down however, it can stay WiFi only, at least with the 16GB entry model.

This rearrangement will boost the iPad quarterly figures. Last quarter, Apple sold 26.035M iPads and 6.049M iPods. If 3-4M of the latter were iPod Touches; with an iPad SuperMini instead, iPad unit sales would have been nearly 30M, a much better headline figure. As Apple should have sold at least 10M iPod Touches in 2013, adding those would have made the iPad sales figure 85M+, so showing the true strength of the iOS ecosystem to developers. This would also help to counter the best efforts of market analysis companies to emphasize Android market share, where most of their paying customers try to make a living. And as perception means much to the markets, if Apple is seen as increasing its tablet share, it can't but help the share price.

It reduces the iPad entry price. The A6 (or A7) SuperMini could keep current iPod Touch pricing, that is $229 for 16Gb, $299 for 32Gb and $399 for 64Gb and a new 128Gb version for $499 could largely replace the 160Gb capacity of the iPod Classic - as that would be twice its price, Apple should be able to sell the existing Classic stock at full price. At this time, the cheapest iPad at $299 is the old iPad Mini which also uses the A5 chip but lacks a retina display. So if Apple chooses to keep available the current 16Gb iPod Touch as the entry level iPad and reduces the price to $199, the entry price drops by $100 and it has an A5 powered range of different iPads with different screen sizes at $100 steps. The only downside: the usual commentators talking up the apparent drop in the iPad Average Selling Price.

Unit sales should increase, as many potential customers won't either search iPods for a tablet or realize the iPod Touch is effectively a 4 inch iPad. It can now be included in all the iPad ads, using the well proven Apple theme of good, better, best - differentiating the iPads by screen size as well as resolution. As an iPad, it also becomes a more desired gift for children and teenagers, especially if it is marketed as a great controller for the enhanced Apple TV discussed in my Nov 7 article. Indeed, the launch of that would make a great time for launch of the iPad SuperMini and, with the focus on a new more profitable Apple TV, killing the iPod as a separate product line.

The functionality of the iPods Nano and Shuffle can be included in wearables and so migrate all the iPod functionality to iOS. An iOS iPod Shuffle could even be kept on as a low end, introductory product for an iWearables range. If this moves with the fashions then Angela Ahrendts, the new head of Apple Retail and former CEO of Burberry (OTCPK:BBRYF), will have very useful input. In any case, it makes much more sense for Apple to use iPod functionality to build out the iOS ecosystem than keep the Classic, Nano and Shuffle as products with a different OS.

A move like this stands a good chance of capturing more value from what is left of the iPod market than its current slow slide into insignificance. It will free up whatever resources at Apple are still iPod linked. Apple though has been advertising for New Product Introduction Operations Program Managers for the iPod lineup which suggests a new range or an iPod relaunch but advertising like this is a good way to find the people without bringing on fevered speculation about iWearables.

Obviously this should be looked on as a minor move for Apple, and most probably revenue neutral or positive. That is the extra sales of the iPod Touch as an iPad SuperMini should at least make up for the lost revenue from the iPods Classic, Nano and Shuffle, when existing inventory has sold out . There could even be a farewell ad campaign, "iPod inside" emphasizing, as Steve Jobs did at the iPhone launch, that iPod comes as part of the iPhone and iPad package. This move will complete the cannibalization of the iPod.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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