Saturday, January 15, 2005

To hear the media tell it, everyone has an iPod, and if they don't already have one, they're soon going to get one. But the fact is not everyone does. Not even by a long shot.

According to the Consumer Electronics Association, the outfit that put on the International Consumer Electronics Show earlier this month, household penetration of MP3 players--not just iPods but all brands--in the U.S. runs about 15%. That makes MP3 players one of the least popular consumer electronics product among U.S. consumers, ahead of only digital television sets, pagers and home fax machines and behind such items as liquid crystal display TV sets and satellite TV systems.

By comparison, DVD players had reached 15% penetration by January 2001, after about three years on the market. As of this year, they're now in about 75% of U.S. households.

The CEA reckons that some 7 million MP3 players were sold in the U.S. in 2004 and that another 10 million will move in the U.S. this year. By comparison, other portable audio products--portable CD and tape players and the like--sold double that number of units in 2004 and will do it again in 2005.

And while those products are on the decline--their sales peaked in 2001--they carry an average unit price of about $35. The average selling price on the iPod during Apple's latest quarter was about $264.

While Apple still has the edge on quality--I've tried out about a dozen different MP3 players, and the iPod is far superior to everything else out there--that case won't always be so clear. Other manufacturers are learning from Apple's technology tricks and trying to improve upon them while undercutting on price. This means in time Apple's iPod profits will be vulnerable.

Sure Apple can innovate by adding features like video and maybe wireless connectivity.

But even for a company as innovative as Apple, that well can run dry, leaving it to compete on price alone. That's a scary thought when you consider that 34% of Apple's revenue last quarter was derived from iPod sales. A sudden, unexpected shift in consumer tastes--they are a fickle bunch after all--could feel like a nasty punch in the nose.

I don't mean to sound bearish about Apple or about the iPod. But as good as Apple's latest results were, I've started to wonder how long the iPod miracle can last. Nothing this good can last forever.