Apple: ecosystem upgrade Benedict Evans Apple has upgraded its iPod family and also iTunes, which +44 (0)7880 786727 [email protected] now includes new social networking features, and revamped Apple TV, now reinvented as a streaming-only Ian Maude +44 (0)7900 698498 device at a fraction of its former price [email protected] Ben Rumley +44 (0)20 7851 0911 We expect iPod sales volumes to continue to slide despite [email protected] the update, but estimate that improved ARPU will add 6 September 201o [2009-093] $600 million to Apple’s topline in FY2011. However, iPhones and Macs are the company’s key revenue drivers The revisions to Apple TV should drive up sales, but the content offering remains weak (especially outside the US) and it is joining an already crowded playing field – its main benefit is likely to be supporting the Apple ecosystem At Apple’s now annual autumn event, this year held on 1 September, the company refreshed its iPod range, embedded social networking features into iTunes and relaunched the Apple TV box at a fraction of its former price. Initially launched in 2006, Apple TV has disappointed to date, but the new redesigned and lower priced offering contains some interesting ideas, gives Apple a platform to build on and renews its commitment to the TV video-on-demand (VOD) market, which has disappointed for a decade but continues to tantalise. iPod refresh Apple has upgraded its iPod line up, with new iterations of the Shuffle, Nano and Touch models. Only the iPod Classic remains unchanged. The new Shuffle includes a control pad on the device and the US price of the 2GB version has been reduced by $10 to $49 (£39 in the UK, down from £45). The 4GB model is discontinued. The Nano has been totally revised with a new smaller design and multi-touch screen, but no longer includes a camera or allows video playback. US pricing for the 8GB and 16GB Nanos is unchanged at $149 and $179 respectively (UK pricing for the 8GB has been increased from £118 and £132, and from £129 to £159 for the 16GB). Finally, the Touch now features front and back cameras, enabling FaceTime video calls to other iPhone 4 and enabled Touch devices (via wifi) and HD video recording, as well as the same high resolution ‘Retina’ display as the iPhone 4. The new Touch also supports Apple’s ‘Game Center’ social gaming platform, due to launch imminently (also included in the new iPhone). Prices for the new Touch are the same as for the old. The new iPods will be available to buy in the week commencing 6 September. iPod product range Model Memory New version Old version New features Price (US) Price/GB Price (US) Price/GB Shuffle 2GB Clickable controls $49 $24.50 $59 $29.50 4GB Discontinued $79 $19.75 Nano 8GB Smaller, multi-touch $149 $18.63 $149 $18.63 display, no video 16GB $179 $11.19 $179 $11.19 playback or camera Touch 8GB Front/back cameras, HD $229 $28.63 $199 $24.88 32GB video recording, Retina $299 $9.34 $299 $9.34 64GB display, Game Center $399 $6.23 $399 $6.23 Classic 160GB - $249 $1.56 $249 $1.56 [Source: Apple] These improvements come against the backdrop of falling iPod unit sales, down 6.1% in the nine months to June 2010 to 41.3 million, as consumers increasingly choose iPhones (which contain an iPod), instead. However, over the same period, iPod revenue rose 4.1% YoY to $6.8 billion, by our estimate, due to consumers buying more expensive models, mainly the Touch, instead of cheaper ones. Our forecasts for iPod sales in fiscal years 2010 and 2011 remain unchanged at 51.4 million and 47.0 million units respectively. However, the improvements to the Touch should drive up ARPU, especially during the key Christmas quarter, which accounts for about 40% of annual sales. We now estimate that iPod revenue will increase 4% in FY2010 to $8.4 billion and fall just under 5% in FY2011 to $7.7 billion (versus previous forecasts of a 3% increase and 10% decline). The new iPods will have little effect this fiscal year, but we estimate they will boost revenue next year by about $600 million. However, the iPod now accounts for only 14% of Apple revenue, less than half its contribution prior to the launch of the iPhone in 2007, so the increase will amount to under 1% of sales in FY2011. iTunes and ‘Ping’ Apple also launched version 10 of iTunes, with some minor tweaks to the interface and two new features: the ability to stream music over a home wifi network from your Mac, PC, iPhone, iPod Touch or iPad to third party hifi equipment and a new music-focused social networking application called Ping. Streaming music over wifi is part of a technology called ‘AirPlay’, which replaces a previous product (‘AirTunes’) that required an Apple adapter to plug into each hifi: now, consumer electronics companies can license AirPlay and embed it in their own products. The two main music streaming services in the US, Rhapsody and Pandora, already have similar programs whereby consumer electronics manufacturers can embed their services into networked devices, and this is an obvious move for Apple to reinforce iTunes’ competitive position. Ping enables users to follow artists (e.g. Lady Gaga has a page) and friends and to post comments on their own and other people’s walls, for example making recommendations and seeing what music purchases others have made. Ping was meant to offer iTunes account holders the opportunity to add Facebook friends to their network, but the two companies were unable to agree terms. Negotiations primarily concern the conditions under which Facebook might share 2 | 6 Apple: ecosystem upgrade [2010-093] 6 September 2010 in the benefits of the viral marketing of music on iTunes (Steve Jobs reportedly commented that Facebook’s terms were “too onerous”). We expect that the dispute will be resolved eventually to permit iTunes to support Facebook integration. Most iTunes users (160 million credit cards are in the system) are likely to use Facebook (500+ million active users) as their principal social networking service and at present Ping’s navigation and communication tools are very limited compared to Facebook. Integration with Facebook has become a standard feature in music streaming services in the course of 2010, with Spotify in particular offering Facebook integration since April 2010. Providing walls for artists and their labels to market the music, the lifestyle, events etc is a space that MySpace Music in particular has already successfully colonised and developed, even while its status as a social networking service has declined dramatically. Right now, Ping disappoints on the substance and wealth of artist- related material. The number of recommended artists is small (only 13 when we registered on launch day, with U2 counted twice). Nevertheless, with a potential customer base of 160 million iTunes account holders, Ping could become a threat to MySpace in particular, due to its focus on music and music discovery. At present, iTunes remains firmly wedded to the pay-per-track model (see Recorded Music and Music Publishing [2010-065]). Despite many rumours, there is no sign that Apple will launch a music streaming application in competition with Spotify, which has claimed it will launch in the US shortly, or Sony’s new music and video streaming service, Qriocity, launched in the US on 1 September and due to roll out to the UK and other major European markets this autumn. Apple TV The new Apple TV is a tiny box (about the size of deck of cards and a quarter the size of the previous model) that connects to a HD TV set and to wifi. It replaces a product first introduced in late 2006 that, in Apple’s own laconic words, ‘was not a hit’. Navigation is via a basic 5-button remote and simple interface. The main changes and new features versus the previous model are: • Content is streamed over wifi with no local storage • Rental content only, with TV rental for the first time (purchased feature films and TV shows on a PC or Mac can also be viewed via streaming over a home network to the Apple TV) • Netflix and YouTube support • Stream content to the device from an iPad, iPhone or iPod Touch The big change, however, is to the price, which has been cut by more than half from $229 to $99 in the US and from £223 to £99 in the UK (including VAT). The content proposition US customers can rent movies (many on the day of DVD release) and TV shows (the day after transmission) from iTunes or watch movies through their Netflix subscription. Prices for movies range from $2.99 for standard definition (SD) library titles in to $4.99 for high def (HD) new releases. TV programmes can be rented for $0.99 per episode (versus $1.99 per episode to buy), but only shows from ABC and Fox are on offer at launch. Pricing is comparable to competitive services, such as Amazon in the US and BT Vision and LoveFilm in the UK. 3 | 6 Apple: ecosystem upgrade [2010-093] 6 September 2010 At present, TV shows cannot be rented outside the US, although, as in the US, they can be purchased, downloaded to a PC or Mac and then streamed to the device. Similarly, Netflix is only available in the US and there is no other professional video content (YouTube movies are currently available in the US, UK, Canada, France, Germany and Australia, but currently only offer a small selection of niche titles).