Why the iPod (yes, the iPod) still matters

October 8, 2012: 7:51 AM ET

Yes, the iPod plays a pivotal role in Apple's turnaround story. But there is another reason it still matters to the juggernaut's fortunes.

By Don Reisinger, contributor

Early iPhone prototypes show the influence of the iPod mini.

FORTUNE -- Every technology company has a product that can be said to define it. For Microsoft (MSFT), it's Windows. For Google (GOOG), it's Google Search. And for Apple (AAPL), a company that once had the word "computer" in its name, it's the iPod. That's right, the iPod, not the iPhone or iPad or any future i-device coming along.

Why?

To answer, let's go back in time to 2001. Apple co-founder Steve Jobs was firmly in charge, delivering newly redesigned Macs that were helping the company tread water. It was clear that Apple was in better shape, but it hadn't yet found a panacea. Until the iPod. Of course, the music player became a near-instant hit around the world, and suddenly Apple was back on the upswing. (This story also became canonical business  hagiography.) Apple sold its one-millionth iPod in June 2003 and hit 2 million just six months later. Within three years of its launch, sales had hit 10 million units.

At the time, the market wondered just how many more sales the iPod could generate. But as time went on, the conversation changed to one that centered on speculation over if -- not when -- the iPod train would stop. In its first 10 years of availability, Apple sold 300 million iPod units worldwide. "If ever there was a product that catalyzed Apple's reason for being, it's this," Jobs said once of the iPod. The music player, coupled with iTunes, revolutionized the music industry. Indeed, consumers largely stopped buying CDs. And when walking around town, it was hard to find anyone listening to music that didn't have white earbuds having from their heads. A culture formed around the iPod. And it was one that transformed Apple and Steve Jobs to iconic status.

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But then, something changed. Starting in 2007 with the launch of the iPhone, Apple's iPod started its slow descent into obscurity. The many iPods were still available, of course, but they lived in the iPhone's shadow. And as that shadow grew larger, sales started to falter. Apple consumers realized that the iPhone could double as an iPod, so spending extra cash on a Nano, Shuffle, or iPod Touch, made little sense.

The iPod's steep decline has become readily apparent on the company's financial statements. During the three-month period ended June 30, iPod sales reached $1.06 billion, representing just 3% of Apple's total revenue. iPod sales were down a whopping 20% compared to the same period in 2011. Overall, 6.8 million iPods were sold during the period -- a 10% decline. (It was a much different story in 2006. In Apple's fiscal fourth quarter in 2006, the company sold 8.7 million iPods and generated $1.6 billion in revenue. That tally made up one-third of the company's total sales – a far cry from this year's 3% contribution.)

There was a time when iPod discussions made up nearly all the investor notes analysts sent out. Nowadays, it's hard to find a single analyst that'll even mention the music players in their advice to shareholders. At just 3% of Apple's overall business, iPods have become -- to borrow a term from analysts -- immaterial.

Apple has walked an odd tightrope with the iPod. On one hand, the company doesn't want to totally ignore the devices, since they're still bringing in billions of dollars in sales each year. However, Apple would much prefer to sell iPhones or iPads over iPods. The company's flagship devices sell at higher prices, helping it to boost its performance and continue to beat Wall Street expectations. Add that to the high margins they produce, and it quickly becomes clear why iPods are an afterthought.

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Still, because iPods generate billions in cash for Apple each year, they've become a bit of a necessity -- the products that Apple will continue to release simply because it doesn't want to disappoint Wall Street. So, the company recently announced a new iPod Touch and iPod Nano at its iPhone 5 event. The announcements were strategically placed after the iPhone 5 was announced to all but guarantee they were given low billing in news stories.

Does the average person care that Apple is slowly easing iPods aside until finally, its impact on its financials is so small that it can discontinue them? Not a chance. A solid argument can be made that every iPhone or iPad a person buys is really another iPod sale. After all, those devices integrate all of the features found in today's iPods. They are, for all intents and purposes, iPods on steroids.

That's why the iPod really matters. The iPod as we once knew it is definitely going the way of the Dodo. But the iPod – a platform that allows consumers to play music and video while mobile – is morphing into its next state as a component in a product that can do more. And that's why it still matters: The iPod isn't dying. The iPod is simply entering the next phase of its long history.

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