Are There Problems With iPod Sales?

Posted by: Arik Hesseldahl on February 22

There’s been a lot of bellyaching of late around the subject of iPod sales, and whether or not they’re slowing, and what that means for Apple.

Well, first off, its true: The rate of unit growth in iPod sales is slowing. Attribute it to the law of large numbers if you want, but there’s a moment where the sales of the iPod will reach a point where they’re sufficiently large, and the market is sufficiently saturated, that the growth potential will be minimal, and unit volumes will be fairly predictable. That moment appears to be at hand. True, Apple set a record with iPod sales record: 22,121,000 units sold in the fiscal Q108 (aka the holiday quarter). That was only a 5% improvement upon the Q107 of 21,066,000 units. This growth rate doesn’t compare favorably with the 50% growth rate that occurred from Q106 to Q107. What it generally means is that iPod sales may have entered a period where they’re going to level off and fluctuate within a predictable range. If iPod sales follow a similar pattern throughout 2008 as they did in 2007, you can probably expect iPod unit sales to settle within an annual range of 50 to 60 million units. Then again Apple might surprise us.

So while unit growth appears to be entering a mature phase, average selling prices (ASP) have been dropping steadily. If you follow the iPod over its lifetime, you see that while adding more models at varying price points has generally helped boost unit sales. Historically the most popular model by volume has been the iPod nano, and before that the iPod Mini. The average selling price on an iPod in 2002 was $360; in 2003 it was $366; By 2005 it was $202. In 2007 it was $161.

In the first quarter of fiscal 2008, the ASP ticked up about to $181. Why was that? The iPod touch came out, and it sells for more than the rest of the lineup. Historically if you look back at Apple sales data, you find that the average selling price on iPods tended to fall sequentially by about $10 from the fourth fiscal quarter to the first. In Q104 for instance, the ASP on an iPod was $349 versus $360 in Q403.

That changed in 2006 with the introduction of the improved video iPod on the higher end right before the holidays. That year the ASP on an iPod went from $188 to $207. In the 2007 holiday season, Apple bowed the iPod touch, which starts at $299. Result? An ASP that surged by $22 to $181.

With the economy slowing, and the seasonally predictable slowdown in iPod sales upon us, Apple’s taking a predictable path: Drop the prices on the low end to keep the volume up. Plus if you get people in the door at the Apple store with the intent to buy a $49 iPod shuffle, you have the chance to up-sell them on a better $69 model, or maybe even a nano. Still, you can bet that there will be a more expensive model announced in the fall in order to maximize ASPs when sales volume is seasonally higher. It’s just common sense on pricing.

Now there’s another issue that’s just as important and that’s how much the iPod accounts for overall revenue. After growing a lot — from 2% in fiscal 2002 to more than 39% in fiscal 2005 — the iPods strength as a percentage of sales has begun to contract. Its strongest quarter was Q106, when iPod revenue accounted for 50.55% of sales overall. In Q107 it was 48%. In Q108, it was 41.6%. There’s two reasons for that. One is that overall downward trend in iPod ASPs. The second is the resurgence of the Mac. Units sales of Macs were north of 7 million in fiscal 2007, and will probably break the 10-million unit mark this year. The last two reported quarters have seen the highest numbers of Mac sales ever. For the last few years the real “power quarter” for Mac sales has been the fourth fiscal quarter, AKA the “back to school” quarter, and during the last two fiscal years Apple has done between 11% and 13% of its overall sales for the year selling Macs during that period.

So, yes, the iPod sales are slowing, and yet setting records at the same time. Crisis? No. Just the predictable growth and pricing trajectory of a hugely successful product offset by a newly successful product. Now will everyone please calm down?

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