Analysis: How the iPod changed Apple's fortunes

These days, when Steve Jobs takes the stage to announce a new iPod, there are typically thousands of people on hand, as the press descends upon wherever Apple is holding its launch event to relate the details to millions of users waiting to see what the company has in store. The original iPod’s debut was a bit different—just a hundred invited guests or so at Apple’s Cupertino headquarters to see Apple CEO Steve Jobs reveal a 5GB music player. And while the assembled audience was enthusiastic, it certainly wasn’t on par with the hollering and cheering you’ll hear at iPod events these days.

“Originally it had pretty humble ambitions,” recalled Ross Rubin, director of analysis at NPD Group. “It was intended to be something that would get Mac users into the store at a time when there was pretty slow growth in the PC industry. This was going to be a nice holiday offering for Apple, but it was sort of an incentive to get users excited.”

Users got excited all right—to the tune of 125,000 iPods in less than two months after the device started shipping. Total iPod sales have shot well past 67 million in the five years since the device launched. And with a recent round of updates to the entire iPod line, strong sales of the music player figure to continue in the near future.

But on the iPod’s fifth anniversary, it’s worth looking back to see how the handheld device got to the lofty position it enjoys today.

Reinventing the (scroll) wheel

The MP3 player was not a new idea when the iPod came out—there were plenty of others on the market, most notably SonicBlue’s Rio, Creative’s Nomad, and the Archos Jukebox. But the iPod captured the heart and minds of the public like no other device since the Sony Walkman.

Unlike the Walkman, the iPod had to connect to the computer to download songs, so there was an extra step that Apple had to simplify for users. But this step proved to be where the iPod distinguished itself from the competition.

“The key to the iPod’s success has been the tightly integrated hardware, software and services,” said Roger Kay, president of the market-research firm Endpoint Technologies Associates. “So, the software is the iPod operating software and the iTunes application; the hardware is the iPod and related accessories; and the service is the iTunes Music Store. It all works like a charm.”

With the hardware and software in place, Apple was on its way to dominating the MP3 player space. In 2003, it established a similar stranglehold over the market for legally downloaded music by launching the iTunes Music Store.

But as significant as those steps were, releasing Windows versions of both the iPod and the online store really opened the floodgates for Apple’s consumer success. With the release of iTunes for Windows and an iPod formatted for the operating system, Apple became more than a niche computer-maker with a another cool device. It was propelled into an iconic brand that were known the world over for making the coolest MP3 play on the market.

“The iPod has certainly raised the awareness of Apple and opened up the brand to consumers that may have had misconceptions about the Mac and may not have considered it in the past,” Rubin said.

Embracing the halo

This phenomenon became known as the “iPod Halo Effect.” Would iPod users become so enthralled with their diminutive music player that they may consider purchasing a Macintosh? It seems that is exactly what happened.

“After a lot of wishful thinking, [the iPod] has even helped rejuvenate Apple’s computer business,” Kay said.

As mentioned, in the first quarter the iPod was available Apple shipped 125,000 units over two months—not bad for a new music device. That quarter Apple also shipped 746,000 Macs and reported a profit of $38 million.

Skip ahead five years to the fiscal fourth-quarter of 2006. Apple reported a profit of $546 million; it shipped 8.7 million iPods and 1.6 million Macs.

The iPod is certainly credited with having an affect on those numbers over the years, but as NPD’s Ross Rubin points out Apple has not forgotten the Mac.

“There have been a number of things on the Mac side that have helped their cause in the past few years,” Rubin added. “For instance, the industrial design, a successful Intel transition and the Apple Stores, to name just a few.”

The future

Where does the iPod go from here?

The iPod continues the be the darling of consumers, but Apple does have some competition on the horizon. Microsoft is getting set to launch its Zune multimedia player, but that may not be the biggest threat to Apple’s dominance.

“Clearly in terms of the overall category the bigger competition is cell phone,” Rubin said. “It is the one device people have with them all the time.”

Rubin also warned that while many scoff at the Zune, Microsoft’s entry into the market should not be taken lightly. “While from a tech and design standpoint the Zune may not represent a dramatic departure, Microsoft is a very serious competitor,” he added. “Microsoft will stay in the market for many years and spend millions of dollars to promote the Zune.”

With its rumored newly redesigned video iPod on the way and the launch of movie purchases from the iTunes Store, neither analyst thinks that Apple will lose its dominance in the near future. However, the company’s overall share of the market could decline with the added competition.

“It would be natural for its share to decline in the face of increasing competition,” Endpoint’s Kay said. “Companies that found markets often cede some share after an initial period of dominance. Vista and related technologies, not to mention Zune, will likely give Apple a run for its money. That’s OK, though. Because even as it cedes some share, the company can keep right on growing its iPod business for many years and will likely be the dominant player for the foreseeable future.”

From legal music downloads to a sea of white headphones in busy cities around the world, the iPod has changed the way consumers think of buying and listening to music.

“The iPod was the touchstone product that really drove home how media was becoming digital,” Rubin said.

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