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Ditching the Training Wheels: Why the iPod Touch Will Be Discontinued

Shortly after it was announced in September 2007, Steve Jobs described the iPod Touch as “training wheels for the iPhone”. Those training wheels have served Apple well over the last four years.

But I’m convinced that Apple is ready to ditch the training wheels—and the iPod Touch along with them. While it may not happen this year, I wouldn’t be surprised if it does. If the iPod Touch is still around three years from now, I will be very surprised.

Let me explain why the end of the iPod Touch is inevitable and why Apple might be closer to discontinuing the iPod Touch than most think.

Why Discontinuing the iPod Touch is Inevitable

By all accounts, the iPod Touch has been a very successful product. Apple has sold over 60 million iPod Touches which represents almost a third of all iOS devices sold. On recent earnings calls, Apple has noted that iPod Touch sales continue to grow and now account for over half of all iPod sales.

So why would Apple discontinue a successful product?

iPod Sales are Stagnating

Explosive growth is everywhere in mobile. I’m accustomed to looking at graphs with a sharp upward trajectory. So graphs that deviate from that pattern stick out like a sore thumb. Last October, Asymco published one that showed how iPod sales had been passed by iPhone sales.

Graph showing iPod sales have stayed relatively the same while iPhone sales have grown rapidly to surpass iPod sales

Since 2006, iPod sales have stayed at near the same volumes. There are seasonal growth spurts—many are sold during the holiday season. But overall growth has stagnated.

iPod revenue has continued to grow due the fact that an increasing percentage of iPod sales come from iPod Touch devices which have a higher price point. But even that growth didn’t prevent Apple from experiencing a decrease in iPod sales in Q2 with 9 million iPods sold compared to 10.9 million in Q2 2010.

No matter what silver lining you find, it is clear that iPod sales aren’t keeping up with iPhone and iPad growth.

The Market for the iPod Touch is Shrinking

When people talk about the market for the iPod Touch, they usually talk about three types of people:

  1. Teens and pre-teens who do not own an mobile phone
  2. Adults who have to use a different phone for some reason (e.g., a corporate-supplied blackberry), but want an iOS device for personal use
  3. An adult who cannot afford the price of an iPhone and its recurring fees so they have a cheaper phone

There is demographic data that supports reason number one. In January 2010, Comscore and Admob released a survey that found that 65% of iPod Touch owners were seventeen or younger.

Graph comparing demographics of mobile platforms including iPod Touch

However, the number of youth who don’t have mobile phones is decreasing rapidly. Pew Research found that in the United States the “bulk of teens are 12 or 13 when they get their first cell phone”. The average age that U.K. children get their first mobile phone is eight years old. The trend around the world is towards children getting mobile phones at younger ages.

age at which child got first cell phone - parent reported

This means that over time the 65% of iPod Touch owners who are under 17 are likely to convert to a mobile phone. If they can afford an iPhone, they’ll likely get one. Otherwise, they end up being very similar to the adults who want an iPhone, but can’t afford one—effectively collapsing those two segments into one.

As the number of people without smartphones decreases regardless of age, it really comes down to choosing the iPod Touch because the iPhone is too expensive. If only Apple planned on selling a cheaper iPhone to reach those people.

A Quick Aside: Tell Me Again Why Companies Should Make Products to Compete with the iPod Touch

Many people have wondered why more companies don’t make products that compete with the iPod Touch.

Let’s take a look at what we know about landscape for an iPod Touch competitor:

  • iPod sales aren’t growing
  • The core market is shrinking as more youth get phones
  • Soon there will be $85 smartphones

Given these facts, why would any company chase the iPod Touch?

Coming Soon: The Cheaper iPhone

There is no question that Apple is going to release a cheaper iPhone. The only question is how much it will cost, what will include, and when it will be released.

Why are we so confident? To repeat an earlier post, Apple COO Tim Cook, CFO Peter Oppenheimer and VP of Internet Services Eddy Cue recently met with Bernstein Research analyst Toni Sacconaghi who published an note to advise his financial clients1. Here is the key paragraph from Fortune’s summary of Sacconaghi’s note:

The analyst says Cook “appeared to reaffirm the notion that Apple is likely to develop lower priced offerings” to expand the market for the iPhone. Cook said the company is planning “clever things” to address the prepaid market, and that Apple did not want its products to be “just for the rich,” and that the company is “not ceding any market.”

So we can be confident that they are working on a cheaper iPhone, so let’s try to answer the other questions.

What will the cheaper iPhone look like? What features will it include?

I have no idea. It’s been fun trying to track the rumors of the next generation iPhone and try to figure out what might actually be rumors coming from the new, less expensive iPhone.

How much will it cost?

The Bloomberg reported that the target price for the cheaper iPhone is $200 without contract. The Wall Street Journal said that the cheaper iPhone “would be available to carriers at about half the price of the main iPhones. That would allow carriers to subsidize most or all of the retail price”.

When will the cheaper iPhone be released?

I believe it will come out in September with the next generation iPhone. Not only does the timing make sense, but I think it would have been irresponsible of Cook and Oppenheimer to discuss the cheaper iPhone with the Bernstein Research analyst if it wasn’t due this year.

Is there room for a cheaper iPhone and the iPod Touch?

The low-end iPod Touch costs $229. If someone can get an “iPhone Nano” for around $200 without a contract, why choose to buy an iPod Touch. Even if you don’t use the phone capabilities, you can simply use it on WiFi. If you can later afford to use it as a phone, you’re set.

Right now, the iPhone and iPod Touch can coexist because while the iPhone sells for less than the iPod Touch, that price isn’t the true price. It is the subsidized price and consumers understand the commitment they are making. A contract-free, $200 iPhone will cannibalize iPod Touch sales.

Would Apple Really Cannibalize its Own Product?

Yes. This is what sets Apple apart. It isn’t afraid to cannibalize its own products. Plus, Apple needs to sell cheaper iPhones for many reasons I’ve covered in the past.

More Signs that the Cheaper iPhone Will Replace the iPod Touch

I’ve suspected that the iPod Touch would get EOL’d for quite some time, but recent developments have made me convinced it is going to happen sooner rather than later.

First, in order for Apple to go after people who haven’t been able to afford an iPhone, they need to do more than simply provide a less expensive phone. They need to address some of the following issues:

  • The phone needs to work for people who don’t have a computer for syncing.
    Last week’s iCloud announcement now makes this possible.
  • If they want to pursue prepaid market, it needs to be available without contract.
    This is a constant in all of the rumors about the cheaper iPhone
  • Ideally, the phone would be unlocked so you can pick the best plan.
    For the first time this week, Apple started selling unlocked iPhones in the United States. This will allow people to use iPhones on regional carriers like MetroPCS, Virgin and Cricket.
  • Being unlocked won’t be as useful unless you can switch from carrier to carrier.
    Verizon’s CFO has confirmed twice that the next iPhone will be a “world phone” meaning that it will support both CDMA and GSM allowing it to hop between networks.

In addition, if they want to attract more of the teen audience, they should find a way to replicate the success of the Blackberry Messenger. Oh wait, that’s right. Apple now has iMessage.

So those are the tactical things that Apple needs to do in order to have a successful cheaper iPhone launch. What other signs are there that the iPod Touch might be nearing the end of it’s life?

And perhaps most importantly, the new iPhones are going to be announced at the event that Apple has traditionally used to launch its music products.

Will the iPod Touch Be Discontinued this Year?

I’m increasingly convinced it will happen soon. Will it happen this year? I’m not sure.

But it seems clear that Apple is preparing to take off those training wheels and go after the lower end of the smartphone market.

10 Comments on “Ditching the Training Wheels: Why the iPod Touch Will Be Discontinued”

  1. Tom says:

    This would be the final abandonment by APPLE of educational initiatives.

    There are a great number of schools who’ve invested in the iPod/Touch as a low cost (their budgets are all being slashed) method of increasing ed-tech in classrooms.

    If you look back to APPLE in the ’80’s, they were very big proponents of educational initiatives. Gone are the days…

    • Jason Grigsby says:

      If the price of an iPhone and an iPod Touch are a wash, then why would it matter to the education market?

  2. As usual, insightful and thorough analysis Jason! The platform is clearly on its way out. Just hope MS doesn’t kill the Zune HD :)

  3. Eric Burnley says:

    Great analysis. Is something like a voice plan-enabled iPod Touch (a Wifi internet, voice plan only phone) out of the question for Apple? As far as cost savings go, it’s the recurring data plan charges I’d expect parents of that 65% teenage market share of iTouch owners to want to avoid. I’m sure Apple could come up w/ a very nice stripped-down Wifi-ready phone, but is that a niche totally closed down by carriers now? Are carriers now readily assuming they can get that data plan $$, and it’s solely up to Apple to come up with a cheaper product that plays within their newly defined (and ever-changing) data plan restrictions?

  4. @Eric- why bother with a wifi only phone if Apple can produce a sub-$200 pre-subsidy phone with both wifi and cellular. If a parent doesn’t want to pay the subsidy, they can install Skype or use FaceTime over wifi instead.

    @Tom, Apple agent abandoned education even if they discontinue the iPad. The trials happening with iPads right now and that device is far more interesting than iPod touches ever were. The touch is just too limiting in the classroom to stack up well against iPads. I wouldn’t be surprised to see sub-$300 iPads in the next few years, too, right after the trials have been completed, the educational proof is there, and the “mainstream” school start adopting.

    @Jason, compelling idea and a very original though. My question for you: why discontinue the iPod? They haven’t discontinued the original hard-drive driven iPod, the nano or shuffle. Why would the touch be the first of the family discontinued? I can see it being eclipsed like the other iPods have, but discontinued?

  5. Steve says:

    Jason, you’ve convinced me.

    Why discontinue? To get all sales of this form factor counted as iPhone sales.

  6. I’m totally on board for purchasing an iPhone w/o pricey data plan. That’s the only reason I’ve not gone down the iPhone path…I need a phone + PDA + camera. I do all my web work on my iMac, MBP or iPad…no need to struggle w/tiny screen AND pay Verizon $$.

    Thanks for the great article!

  7. Jason Grigsby says:

    @elia I think that every other product has a clear difference. You can simply look at the product and tell how the iPod Touch differs from the iPod Classic, Nano, and Shuffle.

    The main difference between and iPod Touch and an iPod Touch is the phone and the price. If you eliminate price, there is going to be little to distinguish.

    I also think Apple is going to sell A LOT of the cheaper iPhones. So many that they will need to make sure that the parts necessary to build them are readily available. Apple is really good at streamlining their products so that they can get economies of scale on production.

    All this said, I could see the iPod Touch hanging around like the iPod Classic. Something that Apple doesn’t promote and that you forget they still sell. I had forgotten until you pointed it out.

    The fate of the iPod Touch is interesting, but in the grand scheme, it is a subplot to what I think will happen with the cheaper iPhone. If Apple delivers something that works with the prepaid market and is a global phone, I think they will again disrupt mobile and in particular the carriers in the United States.

  8. Amye says:

    In other areas, this has already happened.
    If we consider Apple and Verizon as ‘cell phone providers’ (roughly), then Verizon, from what I could tell, has already gone this way. In the Lloyd Center store the other day, I couldn’t find a phone that has voice and texting as its’ primary use. Everything that was being shown on the sales floor had a required data plan. Two years ago, I was easily able to find a useful texting phone that didn’t tie me to a data plan.
    I may be conflating the two markets inaccurately, but I was mildly surprised. I think you’re onto something.

  9. Jason Grigsby says:

    There is a new article at TUAW that covers this topic as well:
    http://www.tuaw.com/2011/06/18/point-counterpoint-on-the-iphone-5-replacing-the-ipod-touch/

    It points out something that I had missed. iOS 5 hints at iPhone, iPad updates, but doesn’t include a reference to an upcoming iPod Touch upgrade http://www.tuaw.com/2011/06/07/ios-5-hints-at-iphone-ipad-updates/