iPhone: The Death of the Video iPod, the Rise of the Nano

I’ve got another Apple prediction. Judging by how Apple is setting up their prices, I conclude that we will see our first touch screen Video iPod in one year from now, but not in six months. In fact, just analyzing their prices and past history, I can conclude a great deal about how their lineup will change over the next year.

  1. Nanos will start playing video, but will keep their tiny screen.
  2. The shuffle will double in capacity, but only if the market pressure rises.
  3. Video iPods get no capacity upgrades, but will get multi-touch about a year from now.
  4. The iPhone will see its first price drop. No other spec changes.

And over the next three years, I even predict the tumble of hard disk based Video iPod. It will no longer be the top tier iPod – iPhones will become that – and it may even be retired.

I drew these conclusions by looking at Apple’s strategic pricing, which is far more revealing than one might think.

Look at the Prices

Below is a list, current as of today, of the entire iPod lineup. The numbers in parentheses are the price difference from the next lower model.

Shuffle 1Gb: $80
Nano 2Gb: $150 ($70)
Nano 4Gb: $200 ($50)
Nano 8Gb: $250 ($50)
iPod 30Gb: $250 ($0!! Take note of this)
iPod 80Gb: $350 ($100)

Figure A

For those of you who don’t know, this is a different price breakdown than what existed not even six months ago (this list was a pain in the ass to figure out):

Shuffle 512: $70
Shuffle 1Gb: $100 ($30)
Nano 1Gb: $150 ($50)
Nano 2Gb: $200 ($50)
Nano 4Gb: $250 ($50)
iPod 30Gb: $300 ($50)
iPod 60Gb: $400 ($100)

Figure B

Look at Figure B. Notice that the price differences between each model of iPod is very consistent at around $50 until the very top of the line 60Gb iPod ($100 difference). When Apple dropped their prices in September 2006, people widely speculated (although that murmur quickly died) that Apple would probably fill in those gaps made in the pricing. However, instead, Apple simply placed two new products far and above the current top iPod:

iPhone 4Gb: $500
IPhone 8Gb: $600

Why? What about the gap? Well, the price reduction wasn’t about making room for a new product — it’s about replacing one. More on this a little later.

Apple wants its iPhone to succeed, but not at the expense of its iPod line up — not yet. So it widened the price difference to keep a significant buffer between the products. Right now, all Apple wants are the loyal early adopters to build up the hype, and make the product the next iconic status symbol (remember the Razor?) of cell phones. They don’t want mass market. They want 1%. Remember that.

But within two years, I predict Apple will fully embrace iPhone, adding in a whole new tier of products that will widely overlap with its hard drive based Video iPods. As I will demonstrate shortly, Apple is prepared to destroy a portion of their own music player market, but only when iPhone sales are picking up steam, and only when the iPhone is technologically ready to do so. With only 4Gb/8Gb of capacity, that day is still a few years away.

Here is how I see the lineup looking by February 2008:

Shuffle 2Gb: $100
Nano 4Gb: $150 ($50)
Nano 8Gb: $200 ($50)
Nano 16Gb: $250 ($50)
iPod 30Gb: $250 ($0) – Multi-Touch, wide screen
iPod 80Gb: $350 ($100) – Multi-Touch, wide screen
iPhone 4Gb: $400
iPhone 8Gb: $500

Figure C

The Shuffle

The Shuffle will remain a valuable part of their entry level market. It will continue to target people “on the go”. Capacity will be increased and this time next year, I expect a 2Gb model. Unlike its big brothers, it will continue to focus on music. The increase will be due to competitive pressure and may not come if its sales continue to dominate.

The Nano

The Nano lineup will start supporting video playback. This is important to keep it competitive with current generation video playing competitors. Also, the Nano’s capacity will be increased so that it can actually store all this video.

Will it have full screen? No. That won’t come for another year or two. Apple will release Mutli-touch from the top and move its way down. This is to give consumers additional reasons to up-sell to the next better iPod.

Notice how the price points will remain exactly the same. This is because I speculate the bottom tier of the prices are the most sensitive to price changes. In other words, budget consumers will weigh price in much more heavily that consumers ready to drop half a grand on a music player. Apple realizes this.

The iPod

This is the most critical aspect of my prediction: iPods will gain the touch screen, but only *AFTER* the iPhone’s price drops. Here’s why:

The Video iPod lineup does not compete with the iPhone. The iPhone has — most critical to a video carrying device — far less storage capacity than what you’d want in a movie playing device. Apple is happy with this because it will keep the “store everything” consumers buying the top-end iPods. Consumers uninterested in storing everything would have bought the much cheaper and smaller Nano anyway. And obviously such a consumer is not interested in the iPhone’s storage capacity either.

Because the iPhone will not cannibalize this particular model, Apple will release their new Multi-touch wide screen interface into the Video iPod lineup. This will give the Video iPod a huge image boost, effectively stamping out all of the video playing competition. But they won’t integrate multi-touch into regular iPods when the iPhone is released because Apple wants to maximize iPhone sales that come from people who want the touch screen. In short, I see the iPod with a touch screen cannibalizing sales of the iPhone, but the iPhone doesn’t threaten sales of iPods – at least not at its current price. Expect this feature released just months before Christmas.

And why does the capacity remain the same? Apple needs to offset the cost of putting in the touch screen while keeping the price the same. The easiest way of doing this is keeping the capacity the same.

The iPhone

The iPhone’s price must drop. However, that price drop can’t happen until the Nano lineup gets a storage space upgrade. When the price of flash drives drops again (to Apple wholesale), Apple will use this margin to upgrade their Nano lineup. Then, rather than apply that margin on the capacity of the iPhone, Apple will use it to drop its price instead. This will happen at the same time or a few months after the Nano drop.

This is, again, brilliant because the iPhone, while $100 cheaper, will not compete with the Nano, due to the fact that the Nano will now have more capacity (double) than the iPhone. This allows the Nano to stay focused as a media device while the iPhone becomes more affordable. And, of course, the iPhone will have that cool full screen view while people that skimp on the Nano are still suck with small screens.

That $0 Price Difference

Remember how I pointed out the $0 price difference in Figure A (current)? And did you notice it appears in my prediction as well (Figure C)? Apple is noticing that the capacity of flash drives is nearing what a consumer would need on a video device, which is part of why I believe the next generation Nano will play video. But why did the iPod sink to the same price point as the Nano? Competition? No.

Within another year or two, the touch screen will become the uniform interface for the entire iPod lineup (sans Shuffle). By the time this happens (less than 2 years), the Nano’s top end model will likely have around 30 Gbs and a wide screen for video viewing. This is inevitable by the fact that Apple’s flash-based player competitors will put pressure on Apple to continue increasing their Nano’s capacity — at the expense of the Video iPod. Sure, a Video iPod by then could have 200Gb of capacity, but there’s another problem. Flash players have far better battery life and are much more immune to physical shock. Not to mention they are just getting ridiculously small.

So Apple is going to phase out their hard disk based players. They aren’t phasing them out because they want to, but, rather, because they have to. And as the Nano gains popularity (perhaps even renamed to “iPod” some day), the disk based player will drop in price until it matches up dollar for dollar with the Nano line up. And some day, perhaps, Apple will simply retire them.

What About the iPhone’s Price?

But what about the iPhone? What happens to its price while all this is happening? Well, while the Nano can play video and will likely have twice the capacity of the iPhone, the iPhone will continue to distinguish itself with the simple fact that it is a phone and is the Internet in your pocket. As the technology matures and the market comes to embrace broadband Internet on mobile devices (as it is in Asia), the iPhone will be a strong player on its own. It will replace the current Video iPod in terms of pricing. But it will always lag behind its flash based Nano counterpart in terms of capacity to keep the Nano in a separate (media player) market.

Remember how I said I can make predictions based on past pricing? Well I’m going to assume for a moment that the old lineup was the way Apple liked it. The following is a chart directly based off of Figure B with only the product names changed. The iPods are all flash based and contain touch screens.

Shuffle 2Gb: $70
Shuffle 4Gb: $100 ($30)
iPod 16Gb: $150 ($50) – flash based, touch screen, formerly Nano
iPod 30Gb: $200 ($50) – flash based, touch screen, formerly Nano
iPod 60Gb: $250 ($50) – flash based, touch screen, formerly Nano
iPhone 8Gb: $300 ($50)
iPhone 16Gb: $400 ($100)

Figure D

That is how I predict the iPod lineup will look in 2 – 3 years: back to its original breakdown, only adjusted for the market disruption caused by the iPhone. Will there be a huge 200Gb hard disk based iPod? I can’t really say it with any confidence. Perhaps, simply because people may demand it. But its bulky, power hungry nature will be offset with the fact that it will be as cheap as the flash based Nano players.

Hard Drives Are So Last Year

The other reason I think the current hard disk based iPods will pass away is because of the popularity that consumes the Nano. The name “iPod” is Apple’s baby. And yet if their derived product, widely known as “The Nano” is their best seller, it would make a lot of sense to re-brand the Nano as the new iPod and rename the old iPods to something else (or discontinue them). And observing that slimmer players with greater battery life (Nano) are increasingly popular, I can only conclude the 200Gb disk-based iPod will probably never be born.

But if they are, expect it to be right there next to the 30Gb flash based iPod (Nano), and probably costing only $50 more. There is the possibility that HD media becomes the norm before the flash drive technology is far enough along, which would allow the old iPods to stay around, although I would gamble they would be renamed and heavily discounted.

I’d say it’s a coin toss at this point.

What Happens When Bundling Puts the iPhone at $150?

One other point I wanted to discuss was the inevitable iPhone/service bundle that a carrier will provide that will place the iPhone at a price point at or below the $150/$200 Nano. My entire point was that Apple doesn’t want to cannibalize its Nano sales, but most people can see how any sane consumer would skip the Nano if they could get the iPhone for the same price or less.

Apple already sees this coming, and my answer to you is this: Apple is phasing itself out of the media-only device market. Why? Because there is a much brighter future in communication-media hybrid devices.

Apple must believe that people are growing weary of carrying both an iPod and a phone. How much time is there before a smash-hit device comes out that can do media and communications at the same time? Cell phone companies have been taking shots at this concept for some time now and they are starting to see success. In a few years, what market will be left for a device that does only media, especially when it costs the same as its cell phone counterpart? Apple decided to strike preemptively.

Conclusion

The iPhone is a market disrupting product because it has the potential to become a run-away hit as a video player but it is a cell phone first. The iPhone’s true success will come when the price reaches current iPod levels. But until then, Apple has literally sacrificed its first born as an investment in this new market.

Apple is the first successful media-device company to entire the cell phone market. Its new competitors are renown for building horrible phones with even worse software, a fact that places Apple high in the minds of consumers. Until Apple’s old competitors (such as Creative) – companies known for building solid media devices – follow them into the market, the iPhone will only gain momentum as the single most desired media phone.