Oh, no! Apple is in trouble again!
Apple's recent growth in its new portable electronic gadget's sales seem to go misunderstood by a certain segment of observers. Just today, we get another nitwit wondering if Steve Jobs can "save" the iPod from destruction by the iPhone. Let me spell this out: if Steve Jobs could move iPod buyers en masse to the iPhone, he'd dance all the way to the bank. Oh, yeah.
Don't throw me into the briar patch!
Back to Basics
The iPhone sells for more than an iPod. Atop the sticker price, Apple receives subsidy payments from carrier partners. The margins on iPhones are incredible. The iPhone also enables Apple to tap users over time for application sales, and to show them something about life on MacOS X, which powers both the phone and Apple's line of desktop and notebook computers.
Moving a buyer from a lower-priced, lower-profit product to a product that is costlier, has higher margins, and enables additional related revenues over time has a name: upselling.
When Apple engages in upselling of customers from music players to the handheld computers it markets as multifunction telephones, however, there's some fraction of people who weep for the "lost" sales of cheaper products Apple might have sold the customer. This is like crying for a Honda dealer who pulls off an Acura sale. Do you think local dealers would rather sell their customers a Toyota, or a Lexus? What do you think Toyota itself prefers? (Note: Lexus is a Toyota brand, made by Toyota, like iPhones are an Apple product. There's no competitor here, it's an upsell situation.)
The truth is that Apple's strategy of offering products at a great range of price points isn't a suicide pact, and doesn't for any reason compel Apple to have enormous sales volume at any given price point. Apple's pricing strategy is intended to ensure that every customer can see an Apple music product at the price they want to pay so they will enter the store, where Apple can upsell them. The fact that some of them really only want an iPod Shuffle for the gym on a given day is no problem for Apple: the iPod Shuffle isn't really competition for the iPhone. It is competition for competitors who want to hook customers on proprietary file formats that might make it hard to later become Apple customers, though, and Apple stands guard against it with its own online store and its own line of players.
So far, Apple seems to be doing pretty well with this.
As the iPhone gains capabilities, the overlap between customers for the iPhone and Apple's other products will increase. Sure, the iPod Touch is a direct competitor for folks who didn't want the phone on their handheld. However, the iPod's 80GB storage attracts some folks who don't see the iPhones' 8-GB or 16-GB storage as offering a plausible substitute. That gap will close, and as it does the iPhone will attract more and more of the iPod's former buyers.
This works to Apple's benefit: iPhones generate more revenue for Apple.
On the other hand, as iPods march downward in price, they crush the hopes of competitors who want a piece of the large and growing portable music player market. Apple does better making a $99 sale to some distant music lover in a foreign land than it does keeping all its products at $200 and higher. The brand-building exercise Apple is running with in the music business is likely to continue paying dividends as long as Apple keeps the user experience good with whatever product Apple provides.
Why we have to keep hearing about iPhones hurting Apple by eating into iPod sales when the math works in the other direction -- that upselling benefits Apple -- is a result of two colliding trends. First, Western media aren't paid to be accurate, but to be viewed -- which is how advertisement revenue is built. So-called news outlets aren't making their money on truth but on sellers of products and services who pay 'news' outlets to show you ads while you read their thoughtless drivel. Second, alarmist disaster news is attention-getting, which (a) reinforces the eyeball count so important to the ad sales, and (b) makes good FUD.