Apple rocks. And puts us to sleep.

Posted by Christian Ziberg, Wolfgang Gruener

Opinion – Apple’s event earlier today was promoted with a “Let’s rock” banner. But seriously, we must have watched the wrong event. Apple may think it rocked, but come on guys, this product introduction was miles away from the rock star performances we know from Apple and its lead celebrity, Steve Jobs – performances that resulted in standing ovations whether they were deserved or not. Glamorous events and innovative products are inseparably tied to Apple’s marketing and Jobs’ reality distortion field. We feel Apple is slipping in this category, adding the feel of an impersonal big corporation, becoming very predictable and less emotional. Has Apple hit the pause button, because it does not have to innovate anymore?       

There is no other company that creates a similar media frenzy and consumer interest in unannounced products than Apple. Before the original iPhone was announced, more than 300,000 articles had been written about this device around the globe. Or think about just the last week. You couldn’t read any tech mainstream publication without tripping over iPod predictions. They didn’t say a thing, but even the evening news on TV was participating in the forecast frenzy. Talk about a PR dreamland.

But there were also analyst that warned that Apple may be underwhelming and even Cnet wrote that Apple will disappoint. You could have seen it coming. Compared to the expectations that were building up over the last week, today’s event was just that – disappointing. And that may be Apple’s biggest problem. There are expectations that go far beyond you would expect from an Intel, a Microsoft or even Google. And it is simply impossible for Apple to have a killer product every quarter. Apple has grown up into a massive $160 billion corporation with growing dominance in several markets with an intent to do just enough to take advantage of its position. Apple isn’t as exciting anymore as the small and apparently vulnerable Apple from a few years ago.    

The iPod: Boring

The iPod is not what it used to be. The iPods introduced earlier today have a new shape, more storage space and come in new colors, but that is it. Oh wait, there is a shake feature to activate shuffle mode and the accelerometer has trickled down into the device as well. It appears that the nano paints a perfect picture of Apple – the company does not take risks with its hardware anymore. A careful redesign, one or two new features, done. A bit like Toyota releasing a new Corolla. Update the shape, this thing sells anyway.

You may think this leaves the door open for a competitor to come up with a better product, but clearly, Apple's music business isn't just about the iPod anymore. In the past, iTunes was a tool to increase hardware unit sales, but it feels that this scenario may be shifting and iTunes and the seemingly invincible empire Apple has built around it may be assuming the role of the iPod. Content is king and that is certainly the case with iTunes.

Simply put, iPods are not a big deal anymore. Sure, the company reshuffled the entire iPod family. The Classic with a new hard drive a slightly revised touch and the curved nanos. But what once has been a gadget you were proud has turned into a commodity. Summed up in one word: Boring.

Redmond leading the way

Let’s be realistic. Apple’s reputation as being innovative has been overrated in some cases. The iPod was not the first MP3 player, the nano was not the first flash-based player and the touch was not the first MP3 player that had Wi-Fi built in. Apple’s most successful products are based on the mistakes others made before. Example: Microsoft’s first Zune player was a huge opportunity for Microsoft, but the first Zune’s Wi-Fi was crippled down to uselessness and someone from Apple must have sabotaged the development of the device simply by convincing Microsoft  to come up with brown-colored player. The iPod Touch, however, was the Zune perfected and should have been the Zune Microsoft should have revealed. In retrospect, Microsoft was one step ahead of Apple, but shot itself in the foot in the end.      

Since the release of the first Zune, the market has changed. Apple has a tighter grip on the market by integrating more and more products and services into the iPod experience. But if we stop considering an Application Store as an innovation for a moment, the true innovation in this space is still coming out of Redmond. For instance, Microsoft’s new Zunes (still ugly) come with a software upgrade that enables users to buy music right from the radio simply by tagging a song.

It makes you wonder why iPods still do not have a built-in FM radio. Apple did very little to explore popular social networking features. Why is it that users are still unable to share their playlists and stream media from each other's iPod? We know that Apple has been thinking about such features, at least in patent filings, but so far we haven’t seen such features yet. What about VoiP? The iPod touch even doesn't come preloaded with Remote, Apple's own free application that allows remote control of the computer's iTunes library over the Wi-Fi network. Instead, you have to download it yourself from the App Store.

But then, Apple can afford to step on its brakes and has different concerns these days. The ecosystem comprised of the iPod hardware, the online music store and an endless array of add-on products is stronger than ever. Even NBC has to accept that: A year ago, the network pulled shows from the iTunes Store, because Apple didn't allow NBC to increase the pricing of its TV shows to $4.99. After a one-year hiatus NBC is back and quite apparently accepted Apple’s $1.99 per episode pricing ($2.99 for high-definition format). In fact, Apple today introduced broader viewing rights to cover video playback on computers with iTunes 8 installed.

If there is one thing Apple has to be concerned about the iPod, it is its average selling price. During the most recent quarter, iPod sales amounted to almost $1.7 billion, second only to notebook sales ($2.2 billion). Just over 11 million iPods were sold at an average price of $152, which is down from an average of $171 for the year and down from $160 in the comparable quarter of 2007. It is a fact that unit shipments aren’t growing as quickly anymore as they did a few years ago, which means that Apple’s primary concern with the iPod is an increase of the average selling prices (ASPs), in order to keep investors happy.

The iPod touch is the tool to achieve that goal and a $229 8 GB version is certainly positioned to place a safe bet on increased ASPs. But even growth in that area may be limited as the market becomes more and more saturated. Apple’s business interests are shifting and those interests are much less exciting than the hardware that was brought to market in the past.   

Media giant Apple

It appears that everyone knows that Apple will become a media empire, but there is no company that is a significant road block in that path. Microsoft is waging battles on too many fronts and Sony is focused on its PS3.   

Apple posted $819 million in "other music-related products and services" (mainly iTunes-related sales) category for the June quarter, just about half of iPod hardware sales. At the end of 2005, the iTunes business comprised only 16.7% of the iPod business. Conceivably, iTunes could easily eclipse iPod sales in the not too distant future.

Sure, sales of the digital media are also lowering Apple's overall profit margin because of their low-margin nature. It is generally believed that Apple makes only 10 cents from each $0.99 song that is sold. But Apple’s negotiation power is growing every day and Apple is expanding this strategy with its AppStore, which sold more than 100 million applications within 60 days. Jobs expects the App Store to grow into a $1.2 billion business by 2009 – not all of which will go to Apple (Apple takes 30%). The iTunes Store totals will only go up, especially as Apple adds new products to the iTunes mix.


Adjusting our expectations from Apple

So, what do we make of this? It is unlikely that the frenzy around Apple is wearing off anytime soon. Steve Jobs could be introducing iDishwashers tomorrow and it would create a media and investor frenzy. But the truth of the matter is that many of Apple’s products are underwhelming and boring on the surface. A new iPod nano? So what? A rounded iPhone? Great.

It is easy to overlook that the real product development has moved out of our direct view into the background. This is the much more interesting part of Apple right now.  

That, of course, has implications about the reality distortion field as well. Calling today’s event “Let’s rock” may have been the wrong title in our view. But Apple has every reason to party, no doubt about it.