iPod: The once and future stocking stuffer

November 25, 2007: 12:42 PM ET

Apple's iPod is the king of holiday gadgets. But can the company deliver another round of blowout sales in its make-or-break season?

iPod nano
iPod nano. Image: Jon Fortt

It's 7 p.m. at an Apple Store less than six miles from the company's Silicon Valley headquarters, and even in early November, it's already a madhouse. Throughout the upscale mall space, customers are busily poking and prodding the latest iPods and Macs, gushing about how gorgeous everything is.

To make more room for the admiring hordes in this newly redesigned shop, Apple's (AAPL) retail planners have done away with cash registers altogether. Instead, black-shirted salespeople mill about, answering shoppers' questions then immediately handling their purchases using wireless handheld checkout scanners – an impressive display of retail efficiency.

The star of this show is the iPod, and the holidays are its time to shine. Analysts credit the iconic gadget with stoking interest in the company's computers, and laying the groundwork for Apple's latest hit, the iPhone. During the 2006 holiday quarter, Apple shipped more than 21 million iPods -- nearly as many as it moved in the rest of the year combined.

In many ways, this bustling shopping season is critical to Apple's success -- a key element of which is selling boatloads of iPods. But success has also brought challenges. For investors to feel good about Apple's sky-high stock price -- it has doubled this year alone -- they'll want to see ever-increasing revenue and profit numbers. Some of that expansion will of course come from popular Mac laptops and desktops, which at less than 10 percent of the PC market have plenty of room to grow. And some will come from the iPhone.

But some of the growth still must come from the iPod. And despite how popular the device has been –- or really, even because of that popularity -- it's fair to question how much growth potential the little guy has left. These days the iPod still has grabbed more than 75 percent U.S. market share in mp3 players, which means domestic rivals don't have much business left for Apple to steal. Plus, the overall U.S. music player category isn't growing as fast as it used to, leading some to wonder how Apple can hope to outpace last year's stunning holiday numbers.

Apple's new iPod lineup: An analysis (Photos 1/5)

"The iPod will definitely see some slowdown. It will probably grow in the low single digits" in the U.S., predicts NPD Group analyst Steven Baker, who tracks trends in consumer electronics. Because Apple doesn't do much discounting, "on a unit basis the last couple of years during the holidays, they haven't grown as fast as somebody like SanDisk."

iPod growth chartApple, however, doesn't seem too worried about holiday sales. In the three or four years since the iPod became a certifiable hit product, the company has shown an uncanny ability to reinvent the device in ways that help to unload more and more of them. While surprise "just one more thing" announcements are one of Apple's marketing hallmarks, there's nothing secret about the way the company updates its iPod line each year. It happens in September, in plenty of time to generate buzz and get shelves stocked for that crucial holiday quarter.

This time around the iPod's reinvention includes the iPod touch, an iPhone look-alike that sells for $299 (but doesn't make phone calls). In October the touch was already popular enough to claim 8 percent of the overall mp3 player market, according to NPD. The iPod nano, Apple's most popular player, also got an update; Apple managed to squeeze in a larger color screen and video playback capabilities, without making it any bigger.

New iPod nano: up close (Photos 1/5)

Armed with the new devices, international expansion might turn out to give Apple a big part of the boost it's looking for. Though the iPod dominates U.S. mp3 player sales, it's still a small fry in markets like China, where Apple says its market share is about 8 percent, and in France and Germany, where its share is about 28 percent.

Which is partly what brings iPod and iPhone marketing chief Greg Joswiak to Paris, where I caught up with him by phone one recent afternoon. While he is by no means gloomy about the prospects for the U.S. market -- just look at the iPod touch's strong debut -- he is excited about the prospects for growth in Europe and Asia, where consumers lately are buying more PCs and looking for gadgets to connect to them.

"That's a significant opportunity because not only can we grow share, but we don't have, in any of these markets, an incumbent to beat," Joswiak says. "We're actually competing against 'Other' – the off-brands that somebody's trying to sell only on price, and not establishing any value in the market."

Microsoft's Zune: The sequel (Photos 1-4)

That can-do vibe is part of the iPod's history. Apple launched it six weeks after 9/11, just ahead of the holiday season, first positioning it as a cool enticement to stimulate Mac sales. (Initially it didn't work on Windows PCs.) Analysts called the move poor timing, considering many of Apple's peers had spent the year cutting workers and trimming products from their portfolios.

"People thought, again, what are we doing launching a whole new business at a time when we ought to just be tightening the belt?" Joswiak recalls. "We do our best to try to understand what customers are going to want down the road. I'm fond of the Wayne Gretzky quote – you skate to where the puck is going to be."

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