iLounge

Step back to the iPod family of 2004 for just a minute: the cheapest iPod was a 4GB mini at $249, there were "standard" 20GB and 40GB iPods at $299 and $399, and "high-end" 40GB and 60GB iPod photos at $499 and $599. Oh, how things changed, and it all started in January of 2005.

It was obvious then that Apple had three specific hardware engineering challenges to confront in the coming year: entry into the flash player marketplace, creation of advanced music players to discourage competition, and development of next-generation devices to anticipate consumer demand for portable multimedia players. In its unique and unpredictable ways, the company tackled all three goals - and successfully.

First came the January 2005 release of iPod shuffle, which finally delivered on two long-rumored iPod developments: it was the first iPod not to include a hard drive, and retailed for as little as $99, long considered a magic mass-market price point for consumer electronic products. By introducing iPod shuffle, Apple created iPod options at every $50 or $100 price point from $99 to $599 - a major step forward for a brand previously unattainable unless a person had $249 to spend on the iPod mini.

But the company made a critical and unusual strategic decision for 2005: not only would the $99 and $149 iPod shuffles lack for storage capacity, boasting only 512MB or 1GB worth of flash memory, but they would also lack iconic iPod features - a screen and scrolling wheel controls, which had been widely recognized as keys to the iPod's appeal. At the time, Apple's message was clear: if you want more cool features, you'll have to pay for them, but for roughly $100, we'll give you an easy-to-use device with more storage capacity than any of its flash-based competitors.

Competing flash player vendors didn't get it, mocking the shuffle's design, deeming it antiquated technology, and suggesting that Apple had made a serious misstep. Consumers didn't agree. They formed lines at Apple Stores, and individuals purchased handfuls of shuffles at a time. Within its first month of availability, the gum pack-sized iPod emerged as the industry's leading flash-based music player. Competitors were forced to cut their prices and explain why consumers needed or wanted their more complex and less attractive devices, a sales pitch that never gained traction.

Though much of 2005 was spent on price drops and incremental changes to existing iPods - the post-shuffle releases of the second-generation iPod mini at $199 (4GB) and $249 (6GB), the price drops of iPod photos to $349 and $449, then $299 and $399 - Apple was also quietly undertaking development of two new devices that would forever change perceptions of the iPod family. By mid-2005, the iPod was the king of the digital music player hill, but numerous competitors were angling to dethrone it. They'd improved their industrial designs, simplified their interfaces, and tried to match Apple on components and price points. Some were selling outright clones. Others were offering small aesthetic twists. Apple needed something really different, and it waited until competitors had put their cards on the table to reveal its own.

In September, Apple dropped its first bombshell. iPod nano was billed as an "impossibly small" flash memory-based device, and clearly designed to destroy the market for 4GB hard drive-based music players Apple had created in 2004 with iPod mini. The nano's roughly quarter-inch thickness was even more svelte than the iPod shuffle, yet preserved all of the distinctive aesthetic and functional touches of a full-sized color iPod - photo display and album art capabilities included. It was also beautiful, instantly becoming an object of lust, and cementing Apple's status in virtually every observer's mind as the industry's engineering and industrial design leader.

iPod nano wasn't without its own psychological hurtles, though. Apple opted to offer lower nano storage capacities (2GB and 4GB) at its previously higher-capacity (4GB and 6GB) iPod mini price points. It also did away with the mini's four (previously five) body colors, opting for only white and black versions. And early reports from nano owners fixated on the unit's incredibly scratchable front surface, which contrasted with the hard metal iPod mini shell. But the nano continued to steamroll ahead: amazingly, the more expensive nanos immediately proved most popular, selling out nationwide while 2GB models remained available. And both of the black versions were reported to be outselling their white versions, another surprise given the iconic status of the original color. As of December 2005, nano appeared poised to retain all of iPod mini's sales momentum, and no major competitor had a similar or better product to compete with it.

Apple saved its biggest surprise for October 2005, releasing the fifth-generation iPod separately from nano. In a launch that has been voted the most important iPod event of 2005 by a majority of iLounge readers, Apple simultaneously unveiled the new iPod, which was substantially thinner and lighter than its iPod photo predecessor, but could play back videos on its larger 2.5" screen, as well as a paid video download section of the iTunes Music Store. The amazing part: a 30GB model debuted for the familiar $299 price point of a 20GB predecessor, and a 60GB model for $399 with superior battery life. There was no price penalty for consumers to get a video-enabled iPod; in fact, on specs, they did better than they had in 2004 or earlier in 2005 by a wide margin.

But will the iPod "with video" succeed? By early December, reports suggested that the full-sized iPod's sales were strong, and even beginning to match nano's, which is partially surprising given iPod mini's earlier long-term popularity over its more expensive full-sized brothers. Video might just be catching on enough to sway some buyers. Though Apple started the iTunes Music Store's video feature with an anemic selection of $2 television shows and music videos, it then negotiated with NBC, the Sci-Fi Network, and USA Network for an expanded collection of popular current and past TV shows.

In our view, Apple's only iPod and iTunes errors in 2005 were two significant but correctable ones. (We will sidestep the fifth-generation iPod's limited video functionality because it came at no direct cost over prior iPods, and because Apple did a good enough job with the feature, particularly on LCD screen quality, not to be laughed out of the marketplace.) First was the company's choices for iTunes video download prices and quality: we remain uncomfortable with $2-per-download prices for music videos in particular, and do not like to purchase lower-than-DVD-quality video clips for on-computer viewing. Our feeling is that we will make only limited purchases - if any - from a video library built from the ground up at a low resolution, particularly as HDTVs are becoming more common in homes. Better to fix this now than try three years from now.

Second was the company's decision to revert to high-class, high-gloss materials for the bodies of its iPod nanos, having pioneered the concept of resilient and colorful anodized aluminum bodies in its super-popular iPod minis. On one hand, the iPod nano is an undeniably awesome design, preserving the looks of full-sized iPods we have loved for years. But there's a real need for the bulletproof, colorful enclosures, especially for younger users, but also for those who want more than class from a portable media player. Cases only go so far to address this point; iPod bodies could use the diversity, too. We really hope to see a return of the mini, or at least its smart core concepts, at some point in 2006.

Another critical area of growth for the iPod in 2005 was the further development of the "iPod Economy." Also known as the "iPod Ecosystem," this term descibes an ever-expanding collection of third-party hardware, software, and service companies that cater to the needs of iPod owners. Sure, the iPod is a powerful, easy-to-use portable music player, but these companies seek to make it even easier, more powerful, and/or useful in non-portable situations.

Most of the growth took place in third-party hardware, as companies competed to develop iPod-specific batteries, speaker systems, docks, remote controls, voice recorders and car integration accessories. These add-ons helped the iPod accessory business expand from an estimated 300 distinct products at the end of 2004 to well over 1,000 by the end of 2005. Key third-party developers such as Griffin Technology, Belkin, and XtremeMac simultaneously sought to improve their older offerings and expand their product lines, each becoming responsible for an increasing supply of cases and electronic accessories. There is now very active competition to develop iPod-matching FM transmitters, listening devices such as headphones and speakers, recording devices, remote controls, car mounts, and chargers. Developers have cited pressure from major retailers to offer "more" as a primary reason for their expanded product lines.

At the same time, medium-sized developers and newcomers have attempted to cash in on niches, catering variously to high-end and low-end consumers. Premium-priced speaker systems were released in 2005 by companies such as Klipsch and Monitor Audio, trendy cases by virtually every fashion house of note, and top-shelf car integration systems by major aftermarket automotive makers. Their higher prices led to limited sales, but further enhanced the iPod's reputation as a device that appealed to the wealthy and regular joe, alike. (To that end, the United Kingdom's Queen Elizabeth II actually purchased her own iPod in 2005, and U.S. President George Bush received one as a birthday gift.)

More popular in volume were an influx of modestly tested, cheap cases, cables and batteries, mainly produced by vendors in Asia looking for the next "PDA-like" device to accessorize. They were sold at "too good to be true" prices by a variety of very small businesses, many with little concern over quality or customer service. Dismayed by the poor quality, shady salesmanship and occasional dangerousness associated with these products, iLounge publicly announced that it would limit its coverage of such accessories and/or vendors on a case-by-case basis. Separately, Apple Computer introduced the Made For iPod program, a certification and licensing effort partially aimed at distinguishing between good and bad iPod accessories, focused initially on electronics rather than cases. Twice in the year, Apple also surprised accessory makers by unveiling a wide range of its own accessories to coincide with the launches of iPod shuffle and nano, including affordable case options and superior designs that inspired later add-ons.

The dramatic growth of the iPod accessory market has not been without controversy. On the positive side, the iPod's unmatched collection of accessories has created a huge barrier to entry for Apple's competitors, and the iPod has become the first portable device other than a cell phone that's fun to accessorize. Also, the media has taken notice. Impressive third-party developers have created innumerable opportunities for follow-on coverage of the iPod in newspapers, magazines, and televised news. Further, Made For iPod has helped raise the issue of accessory quality, and through licensing fees has helped fund growth of the iPod brand. Some developers have praised the program as a tool that expands the iPod's appeal though marketing, further expanding sales of iPod accessories.

However, other companies have grumbled about the Made For iPod program, claiming that it is little more than a "tax" on member companies with little commensurate benefit, and costs to consumers in the form of higher prices. Certain companies have suggested that the program has provided a strong financial incentive to devote resources instead to non-iPod products, including digital devices from Dell, Creative, and satellite radio companies. And the Made For iPod seal remains somewhat obscure in actual meaning. Products with the logo have been released only weeks before Apple discontinued the iPods they were built for, suggesting that even participating developers aren't getting or understanding information as to what's safe to release. As good as the program may be, it could stand to be improved.

At the end of 2004, the biggest threats to Apple were three large companies - Creative Labs, Microsoft, and Sony - but as of today, their competitive efforts have collectively amounted to very little, and in most cases have lost millions of dollars. The reason is fairly obvious: Apple hit all of its marks this year, delivering better iPods at equal or lower price points than in 2004, building an iTunes Music Store capable of selling both music and videos, and growing the largest accessory catalog in the digital music space. Additionally, by introducing iTunes support for podcasts - free audio and video programs that can be downloaded to a computer or iPod - the company significantly broadened the variety of no-cost information and entertainment available for potential iPod and iTunes users. No one has yet approached Apple's overall package of paid and unpaid iPod "benefits." At this point, is it even possible?

On sales, all signs now point to "no." At the end of 2004, 10 million iPods had been sold. As of this writing, significantly over 30 million iPods have been sold, most likely 36 or 37 million. In any case, this installed base dwarves those of all of Apple's competitors put together, and they know it. D&M Holdings, maker of the Rio family of players, decided to exit the MP3 player business altogether in late August of 2005, suggesting that it couldn't make enough money to jusify continued involvement. Creative, Microsoft and Sony have all launched competing digital music services to iTunes, but despite major cash expenditures and public relations efforts, none have made a dent in Apple's popularity. One likely reason: none of their downloads plays on the iPod, and it's hard to convince people to buy music that only plays on devices with uncertain futures. By comparison, Apple's iTunes Music Store has sold far in excess of 600 million songs, with the pace of sales accelerating.

It is presently unclear as to how much of the iPod's dominance is attributable to brilliant strategy and timing, and how much to the bad luck or strategies of its opponents. For instance, Japanese rival Sony unveiled numerous competing music players throughout the year, even adopting direct support for MP3 playback in an attempt to broaden its devices' appeal. After trying to release color-screened music players without success, it decided to focus on more fashionable flash-based devices with glowing black-and-white screens. These devices won praise for their aesthetic designs and looks, and Sony eventually decided to create a hard drive-based version with the same look and feel. Separately, it released the PlayStation Portable (PSP) multimedia device in the United States, failing to achieve its predicted sell-outs of initial allocations, but garnering considerable praise for the power it had crammed into a $250 package.

Similarly, having spent years talking about the technical advantages of its players, Creative Labs shifted strategies, paring down features and working to come up with a simplified control scheme similar to the iPod's. In late 2004, it debuted an iPod-like device called Zen Touch, plus iPod mini clones called Zen Micros. These smaller players used MicroDrive-style hard disks in iPod mini-sized capacities, and were available in even more body colors than Apple had offered. For 2005, Creative developed numerous iterations of Micro and Touch, including Sleek, Photo, and Neeon, which differed mostly in screens and body designs. Most interestingly, it developed Zen Vision, a next-generation hybrid music, photo, and video player with a $400 price tag and support for several video and audio standards, releasing it before Apple had any video device on the market.

But the release of the color-screened iPod nano and video-equipped fifth-generation iPod - each thinner, cooler, and more affordable than these devices - killed their buzz. In some cases, the buzz never began. Sony's 20GB black-and-white iPod competitor was released on the same day that Apple unveiled the fifth-generation iPod. The differences in price, performance, and style could not have been more glaring: they were all obviously tilted in the iPod's favor. Even those enamored by the Zen Vision or PlayStation Portable's technical capabilities were forced to concede that Apple's offerings were extremely aggressive - albeit incomplete - alternatives. It didn't take journalists long to conclude that the major players were in for a tough holiday season thanks to Apple's last-minute announcements.

With Rio gone, will Apple's other competitors disappear, too? For Sony, the answer appears to be no; the company is reported to be working on a more competitive version of the PlayStation Portable, as well as additional MP3 players. Creative also appears likely to stick around. Despite financial losses and repeated drubbings in each sector of the portable media market it enters, Creative appears to be focusing heavily on iPod-alikes and lawsuits as means to stick around. Most recently, it released the $330 Zen Vision: M, an aesthetic and features lookalike of the fifth-generation iPod, but with five different front shell colors and a couple of standard Creative additions (voice recording and FM radio tuning). And Creative has threatened Apple with enforcement of a recent patent on one aspect of the iPod's user interface, the validity of which is still disputed.

What about Dell, iRiver, and other companies that have been heavily involved with Microsoft's digital music initiatives? They continue to release products that aren't going anywhere. Dell released and now appears to have discontinued the "Pocket DJ 5," a mini challenger which appeared just before Apple refreshed the mini in February 2005, as well as the DJ Ditty, a screen-laden clone of iPod shuffle. It has not released any color-screened digital media players yet, and may not. In sharp contrast, iRiver continues to experiment with a bewilderingly large array of colorful, open standard flash players, including multipurpose audio-video players that possess as little as 512MB of memory. It's hard to imagine that these devices will suddenly become popular, but we haven't written these companies off quite yet.

From all indications, 2006 is going to be the iPod's biggest year ever - and by 2005 standards, that's saying something. In January, Apple is expected to announce record quarterly and annual sales for the iPod family, with numbers that are guaranteed to be upwards of 6 million and 26 million, respectively, and more likely closer to 10 million and 30 million. For reference, sales of 10 million iPods in a quarter would mean that Apple sold as many iPods in the holiday 2005 season alone as in the entire 2001 to 2004 time frame. Even if it misses this number, it will have had a banner year by any measure.

iLounge expects to see dramatic enhancements to the iTunes Music Store's content library over the course of 2006, with the potential for a renaming to address its expanded role as a vendor of non-music content. Television shows will continue to be a major focus throughout the year, with tests of non-television content at different price points to gauge consumer interest. Sales of iTMS video content will accelerate as Apple's content offerings increase, but questions over pricing and usage rights will linger.

We also believe that Apple will take major steps to roll out Front Row, its iTunes/iPhoto/DVD Player media center exoskeleton, on additional hardware past the current-generation iMac, perhaps as an element in the 2006 edition of its iLife suite. The company will likely build Apple Remote-compatible Infrared sensors into its upcoming computers for this purpose, and potentially offer an accessory (like the iPod Universal Dock) that can serve as an Infrared receiver when connected to older Macs.

Obviously, iPod hardware will continue to evolve at a surprising rate. Rumors have continued to swirl on all the predictable subjects - iPod shuffle updates or discontinuations, iPod nano price drops and capacity bumps, second-generation (deluxe) video-ready iPods, and new iPods with features such as wireless connectivity. Though price and capacity changes are essentially guaranteed over time, we believe that wireless and enhanced video are the most likely avenues for iPod evolution in 2006. The wireless features we'd expect to see are headphone accessories and car integration, rather than data synchronization (music downloading) from a computer.

One of the biggest changes in iPod hardware that we expect, however, is increased availability: last year, Apple struggled to make enough iPod minis to satisfy one country's needs, and now it does simultaneous international rollouts for its products - a tremendously impressive feat. But further fine-tuning is necessary for both manufacturing and region-by-region demand forecasting. Apple's supply of iPods still lags behind demand, and the company faces sell-outs both of certain models, and at many retail locations other than its own stores. There are also questions as to how best to grow the iPod outside of its strongest international sales regions. We think that iPod hardware availability will change for the better internationally in 2006, though there may be costs to the company - write-offs and discounts among them - as a consequence.

There will also be a number of new phones compatible with iTunes in 2006, including a number of models that have already been identified by Motorola. A ROKR E2 phone will follow up on the disappointing ROKR E1, a new RAZR phone called the V3i will include iTunes support, and a new SLVR L7 ("sliver") candybar phone apparently will, as well. According to Motorola, Apple is also working on a smart phone - one with greater functionality than the simple ROKRs - which could be released in 2006 as yet another iTunes-ready product. As with all things Apple, we'll have to wait and see.