Will Apple Discontinue the iPod?

It's hard to believe that Apple (NASDAQ: AAPL  ) launched the iPod all the way back in 2001. Building on the success of this product, Apple went on to become the world's most powerful consumer electronics company with the subsequent successes of the iPhone and iPad product lines. But the venerable iPod that brought so much good fortune to Apple is looking terminal as a business, and it's unclear whether this product category has much of a longer-term future.

The numbers don't lie
Below is a table of iPod sales over the last eight quarters:

iPod Sales

Q2'14

Q1'14

Q4'13

Q3'13

Q2'13

Q1'13

Q4'12

Q3'12

Units (millions)	2.761	6.049	3.498	4.569	5.633	12.679	5.344	7.67
Revenue (millions)	$461	$973	$573	$733	$962	$2143	$820	$1.207

Apple's iPod revenue and unit shipment data. Source: Apple

As you can see, the iPod segment has been in freefall over the last couple of years. Units have been cut in half in going from Q2 2013 to Q2 2014 with revenues tracking right along with them. While a part of this is surely attributable to the fact that the iPod Touch (likely Apple's leading iPod product) hasn't been refreshed since October of 2012, the harsh reality is that the iPod is being cannibalized by the iPhone to a pretty severe degree. There is no reason to own an iPod Touch if you own an iPhone, and smartphone penetration continues to grow.

iPod sales will probably keep getting worse
Even at a roughly $500 million/quarter run rate, the iPod represents a $2 billion business for Apple. Further, the incremental R&D required to actually bring this product to market is probably minimal. But the problem here is that expecting even that kind of run rate longer term is probably unrealistic given the continued penetration of the iPhone and, indeed, smartphones in general.

Apple's iPod Touch hasn't been updated in nearly two years. Source: Apple 

While some may truly prefer iOS and Apple products and will gladly pay the $229 or above for essentially an iPhone-sized Wi-Fi-only tablet, the value proposition really just isn't there. When you can buy a Moto G for $179 without a contract and get a much faster device that can eventually be connected to a cellular network, it becomes really tough to justify an iPod unless you have a giant iTunes collection. But how many customers have that but don't have a smartphone plan? It's not zero but it's trending to trivial.

Will Apple discontinue the iPod?
The question, then, is whether Apple will just eventually discontinue the iPod in its current form. As long as the product category is profitable for Apple, it will likely continue to sell the current lineup, maybe updating the flagship iPod Touch models with more advanced silicon. But these upgrades will be few and far between as it simply makes more sense to milk existing products for all they're worth.

That said, it is likely that the iPod Touch has about 3-5 years to live before sales are more or less a rounding error for Apple and at that point it will probably be discontinued. The continued rise of fast, low-cost Android smartphones will continue to erode the already shoddy value proposition of the iPod Touch for cost-conscious consumers, and those not sensitive to price probably own iPhones. The demise of the iPod doesn't seem like an "if" but a "when," but given that the iPod's death is at least partially at the hands of the much more profitable iPhone, Apple probably doesn't mind too much.

The iPod is in decline, but Apple's next big thing could drive explosive growth
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.