iPod rumors take off, again

Posted by Christian Ziberg, Wolfgang Gruener

Chicago (IL) – Digg’s Kevin Rose receives the honor for jumpstarting this year’s iPod update rumors with a picture and rather vague and strange information from his sources what this new update may bring. According to Rose, Apple will shelve the current iPod Nano design, cut prices and add features. Also, Mac OS X might finally see Blu-ray support. But Rose could have missed the most important update of all: An iTunes all-you-can-eat subscription service.

Yes, it is the time of the year again. Apple has always updated its iPod lineup within the first two weeks of September in recent years and it would be a big surprise if there was no update this year. We are well within three weeks of a possible update time frame, which means that you should expect lots of rumors what those next iPods will bring and what they may not bring. Kevin Rose’s Digg is the rumor launch pad for this year.

Here are the latest rumors, according to Rose:

“- Revamp of entire iPod line.
- Small cosmetic changes to Touch, Nano to see significant redesign.
- iPods to see fairly large price drops to distance itself from the $199 iPhone.
- iPod touch 2.1 software, iPhone to get update very soon after.
- iTunes 8.0 ("it's a big update w/new features").
- All of this coming in the next 2-3 weeks.”
        

Needless to say, all of these bullet points may be pure speculation, as there is really now detailed information that would let anyone conclude that this information in fact is accurate. Rose posted a picture of what is claimed to be the next Nano. Is it the actual Nano? Perhaps. Could it be fake? Sure. No one knows. And since the somewhat ugly current Nano was received with praise last year, we are sure that the new one will be welcomed with joy as well. Unfortunately, whenever Rose’s information could be interesting, such as a more functional iTunes 8.0, he notes that he cannot reveal more details.

It is likely that there will be a “revamp of the entire iPod line” and that it will be coming “in the next 2-3 weeks”. At least the Classic, Shuffle and Nano models have lost much of their appeal during the hype surrounding the iPhone and iPod Touch. The Classic may be heading into retirement as the form factor gets a bit old, the weight is out of place and flash capacities could soon be competing with this 80-160 GB iPod. 1.8” hard drives are under attack by solid state disk drives and it is just a matter of time until this hard drive form factor will disappear.

What we do not see coming are the large price drops Rose predicts. While he claims that such a move is necessary to differentiate the Nanos and Shuffles in a more efficient way from the Touch, we do not think that big price drops are likely. There are signs that iPod sales are not scaling as well anymore as they did in previous years and Apple may only be able to meet revenue growth expectations by increasing the average selling price (ASP) of iPods. That has worked in previous quarters as the more expensive Touch has sold well (the ASP of iPod is currently somewhere between $180 and $185), but the Nano remains the best selling iPod and dramatic price drops could have a devastating effect on Apple’s ASPs.

While price drops could be used to increase unit sales, we believe it is unlikely that there will be significant adjustments. However, dropping flash prices should allow Apple to at least double the Flash capacity to 16 GB for the Nano and keep a price range of $149 – $199. The Touch would grow from 8-32 GB to 16 GB to 64 GB and maintain a range of $299 to $499, while we have to admit that the $499 price tag looks out of place next to a 16 GB $199 iPhone. Similar to what car manufacturers do, it would make sense for if Apple price the high-end model of the Nano line declined into the low-end of the Touch line, which would mean that Apple could drop the Touch into a price range of $199 to $399. However, that is pure speculation, of course.

iTunes music subscription at the finish line?

The idea that Apple should introduce subscription-based music consumption through iTunes has been repeatedly suggested by media and analysts ever since Apple launched its online music store. Steve Jobs dismissed such a feature on several occasions, arguing that people want to own their music, not rent it.

However, the Financial Times reported in March of this year that Apple had been in talks with major labels about an all-you-can-eat iTunes subscription model. The business model would mimic that of Nokia's "Comes with Music" and would give customers free access to the entire iTunes music library in exchange for a premium on the iPhone price, the paper said. The report cited an executive who claimed that talks stalled because Apple wouldn't offer labels more than $20 per device, unlike Nokia who reportedly was ready to pay almost $80 per handset. "It’s who blinks first, and whether or not anyone does blink," an executive said. It remains to be seen, if customers are really willing to pay a premium on a device to gain access to a vast music catalogue. Music labels claim that their own surveys had shown that people would pay up to $100 premium to gain unlimited music access for the lifetime of the device. Such business model sounds reasonable for handsets, but industry watchers are wondering if Apple is serious about music subscription.

The Industry Standard reported recently that Apple in fact is in the final stages of introducing such a service, with over half of the iTunes catalogue already prepped for a subscription-based model. The service may be called iTunes Unlimited and will cost $129.99 for a year's worth of unlimited access to the iTunes catalogue. You will be able to download any track you want and there will be an option to buy a track if you want. According to people familiar with the matter, Apple will offer the service through iTunes and as a retail box. It will also be available to MobileMe subscribers at a reduced $99.99 price or $179.99 for a combined one year MobileMe and iTunes Unlimited subscription. MacDailyNews speculated that Apple will announce iTunes Unlimited in September and introduce it in late October. According to the website, Apple will offer music encoded in 256 Kb/s.

In our view, iTunes Unlimited could be the most important announcement in September. iTunes has always been the sales driver for the iPod and such a new service could bring in many new customers. At $129.99 per year, or about $11 per month, the service seems to be priced in line with general expectations. But since actual downloads will cost extra, this may be a pricey feature, especially, if you add it to an iPhone, where it would make most sense. Also, it is interesting to see that this price is more than three times above the price that the music labels found is acceptable to consumers, if we consider the average life time of an iPod of about three years.  

If Rose’s prediction that there will be an iTunes 8.0 with substantial feature enhancements is correct, then this would certainly be a sign that a rental service is going to be integrated into the software.