It doesn't take a rocket scientist to guess why Apple's (NASDAQ:AAPL) iPod lineup is seemingly falling into obsolescence.
After all, the digital media player's functionality is effectively baked into the tens of millions of iPhones Apple sells every quarter. To be exact, iPhone unit sales increased 11% year over year to 43.7 million in fiscal Q2, generating $26 billion in revenue for Apple in the process. Meanwhile, Apple sold 51% fewer iPods over the same period at 2.76 million, resulting in a 52% plunge in iPod revenue to "just" $461 million.
For perspective, that means iPod is now Apple's smallest business by a factor of three, trailing only the $1.419 billion in sales generated from its Accessories last quarter.
A little love for a legacy product
Nonetheless, Apple just gave its iPod lineup some much-needed attention last Thursday.
First, Apple unveiled a new version of its 16GB iPod Touch, which boasts the line's lowest-ever price at $199, now comes in multiple colors, and includes the same rear-facing iSight camera as the higher-end 32GB and 64GB versions. Previously, the 16GB iPod Touch was priced at $229, came only in silver, and lacked a rear-facing camera.
In addition, Apple lowered the prices for its 32GB and 64GB iPod Touch versions by $50 and $100, respectively, to $249 and $299.
Why iPod still means business
For those who want much of the entertainment functionality of a smartphone without a data plan, Apple's iPod Touch lineup now looks like a much more attractive option. But there are also several more reasons this move makes perfect sense for Apple.
First, even if Apple's iPod revenue continues declining at its current clip, by this time next year we'd still be talking about a nearly $1 billion per year business. And yes, that's relatively minuscule in the broad scheme of things for Apple, but I can't blame it for wanting to milk as much as possible out of the product while any meaningful number of consumers are still willing to buy.
Next, Apple is lowering production costs by streamlining the chassis of all three models, which are each effectively now the same device with different amounts of storage. This enables Apple to implement the above-mentioned retail price reductions, which should not only help maintain Apple's margins from the segment, but also boost (or, at the very least, stem declines of) iPod unit sales.
And that's a great thing considering iPods are essentially a gateway to Apple's broader ecosystem. For every iPod Apple sells, it gains another potential consumer who has access to purchase lucrative digital goods from its iTunes, Software, and Services segment. And as of roughly a month ago, that segment includes Apple's $3 billion acquisition of Beats, the purchase price of which was reportedly composed of $2.5 billion for its high-end headphone and music accessories business, and roughly $500 million allocated for the Beats Music Services. Needless to say, Beats should cater particularly well to Apple's iPod user base.
In the end, we're certainly not talking about a complete revamp of Apple's iPod business, either. And over the long term, iPod sales may well continue to fall. But with all things considered, and for what little effort these changes did require, I think Apple just made a great move to extend the life of a still-valid product.