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.

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?

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.

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.

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.

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.

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.

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?

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.

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.

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”.

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.

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.

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.

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?

• Apple ditches “free” iPod touch for its 2011 Back to School promo
• iOS 5 iPod App is Now Called “Music”, Gets a New Icon

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.

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.