Saturday, September 26, 2009

Entering The Third Wave of iPods

Understanding the iPod in 2009

2001-2007 History

The iPod began in 2001 as a $400 Mac-only novel package of software and hardware, expertly designed to play digital music on the go. At the time, few portable digital players sold, despite advantages like skipless playback and equal or greater song capacity. Start-ups and experienced companies alike were unable to properly explain the complicated innovation at hand. A higher-quality example, like the Diamond Rio PMP 300, was inscrutable and clumsy to link to one's computer. Consumers were mystified by the software that moved songs from the computer to the device, and and once they got outside, the simplicity of a Discman beat fiddling with inscrutable buttons every time.

Bringing technology to the "rest of us" by integrating rarified hardware with intuitive software is Apple's ultimate strength. Compared to the Mac, an MP3 player that "just works" was a simple mandate. The iTunes/Scroll Wheel tandem is well known, and once Apple took the iPod cross-platform, wisely abandoning what looked like a strategy to sell Macs, they dominated. Attempts to win back the market, even with much cheaper, but less elegant players, or more "fully featured" devices, failed. (The iTunes Store also contributed to "lock in", though that effect was vastly overrated, given how thoroughly the volume of pirated music dwarfs legal online music distribution.)

Over time, the iPod split into a range of differently sized and priced players, adding video playback and a handful of games, but the design and main goal of the product, to make consumption of portable music effortless, never changed. Even years-long requests for an FM radio were ignored.

2007 Revisions - The Start of Something Different

Apple did not deviate from their plan until 2007, which brought a new type of iPod, the Touch. It looked and acted nothing like any past iPod, offering a range of abilities wrapped in new hardware and software interfaces. Instead of purity of purpose, the Touch offered partial solutions to many problems.

Even in 2001, rumormongers speculated about the meaning of the name "iPod." A pod is a container that could hold anything. People associate the word with aliens or peas, maybe, but not music. Apple being arguably the most exacting, consistent, and effective corporation at marketing, surely meant a variety of "objects."As the screens and chips powering the iPod improved, adding photo browsing and video playback seemed a natural way to fill out the baggy moniker, without adding complexity. By the time the Touch arrived, classic and "nano" iPods could manage both.

The Touch was a true pod, but it shed all of the conventions and assumptions about the iPod. Instead of a scroll wheel, there was a touch screen and single button. "Music" was just one of ten possible choices. In a first, the most expensive iPod would offer less space for music than cheaper line-mates, deemphasizing that core use. The new king of iPods could not even play the simple games its predecessors had years earlier. Apple was warping the most successful consumer electronics brand line ever.

The Touch also sowed confusion, as it looked and acted just like another new product, the iPhone. Both had a best-in-class web browser, Safari, and various data-driven applications (Weather, Stocks, Currency Conversion, etc.), but only the iPhone was connected to the internet via the cellular network. To make these programs useful, the Touch used WiFi, something unavailable to most people unless they are at home, where they own a computer anyway. The Touch seemed an even more irrational product when Apple announced that new applications for the Touch/iPhone would be delivered only through Safari, and therefore become inaccessible outside of the range of WiFi.

2008 Revisions - Plans Drag On

This misshapen iPod line soldiered into 2008, now selling well but not growing as a business. What had been a high-end electronics product in an untapped sector had become a routine offering in a mostly saturated marketplace. Also problematic, in the eight years since releasing the original 5GB iPod, flash memory and hard disks had doubled in capacity five times over.

A music lover who once needed a top of the line player could use even the cheapest screenless Shuffle to carry hundreds of songs. The most devoted listener would be hard pressed to need the 160GB of space now offered in the top non-Touch iPod. The Nano was double the cost of the Shuffle, and its tiny screen made video playback mostly useless.

A card up Apple's sleeve, as we all know, was the Touch itself. Some of the reasons for the sudden appeal of the once incongruous iPod are obvious. Most importantly, the release of the iPhone OS 2.0 allowed developers to write full-fledged applications for the iPhone and Touch. (I won't repeat the App Store story here.) The Touch also got much thinner and more refined (somewhat the opposite of the clumsy iPhone 3G redesign.)

Apple did not publicize two other crucial changes, but both represent below-grade work for the Third Wave* of iPods. The Touch was given the option of adding a microphone and accepting audio in, not just playing songs. Now, an App that could transmit voice over WiFi could offer iPhone-ish telephony, though only near a hot spot. The processor of the second generation Touch was also silently increased in speed to 532Mhz, up from the 412Mhz found in the iPhone, iPhone 3G, and Touch 1.0, a tip off that Apple did not consider the Touch a hobbled iPhone or fancy iPod. The speed bumped 2G Touch is noticeably quicker in menu screens, and delivers higher frame rates in gameplay. Apple surely noticed a trend towards game purchases by Touch owners, and decided to help the "Funnest iPod Ever" campaign really resonate. After all, more speed doesn't hurt user opinion, especially if it's free and isn't advertised to existing customers.

2009 - The Third Wave and a Return to Growth

Early in the year, the Shuffle was redesigned. To the discontent of many, the early-2009 revision Shuffle went buttonless, and so could only be controlled with headphones that carry a chip licensed by Apple. Moreover, added capacity for the same price sounds purely positive, but it is a double-edged sword when you can't see it. With a large price gap between the mediocre 2008 Nano and the newly-hobbled Shuffle, the line had an uncharacteristic weakness, and it was self-inflicted. Why?

The 2G Shuffle was the true atypical iPod, an Apple product planning mistake. Easier to control in one's pocket than the Nano, and capable of holding plenty of music for an average outing, the tiny, durable Shuffle was too good. The supposed "fatal flaw", a screenless design, was, with a little iTunes wrangling and a relatively small number of songs to remember, unproblematic. I suspect the 2G Shuffle was cannibalizing Nano sales. To satisfy Apple's ambition for late 2009, the high-margin, high-ASP sales of the Nano could not wane.

Late year iPod revisions usually have Apple lowering prices and adding capacity to the traditional iPod, maintaining the business. Instead, 2009 brought the culmination of Apple's work to restart the iPod as a growing business, and make the product live up to its name. The changes to the Nano are here, and the revisions to the Touch here.

The shift from focused simplicity is most obvious in the Nano. The added features expand the iPod Nano into a multitude of new businesses. Consumer camcorder manufacturers, pedometer manufacturers, and portable media player manufacturers that made FM radio capability a selling point are all disrupted or ruined.

The stand-alone pedometer is hardly big game, but diluting the focus of the player even slightly is a signal event. Truly heretical is a new FM radio that allows time-shifting. Apple spent the best part of a decade refusing to add the function, and losing sales to less dogmatic companies. (In 2001, it was almost farcical to offer a $400 portable music player that didn't even have a radio.)

Taking on the fast growing "consumer video sharing" segment is Apple's true statement of purpose. Flip, the leader in "consumer video", dismissed the lower-quality Nano's camera. However, it was simplicity of video sharing, on the internet and in person, that was Flip Video's bread and butter. The traditional camcorder business model, to provide high-quality optics and recording, then use complex software to edit the result, was blown apart by Flip. The Nano is one tenth the volume of the Flip, Apple's software and hardware are of legendary quality, and the video quality deficiency will be solved by the same exponential improvements in transistors that originally made the single-use music player a relic. The protestations of Flip executives seem hypocritical or nonsensical, and the burgeoning "consumer video" market is Apple's to lose.

The Late 2009 Touch revision was also a Third Wave initiator. The low-end model is now $199, a price point no competitor can match. Sure, the oft-noted volume purchasing discounts on flash memory and shared iPhone compenentry lead to savings, but the Touch also faces no OS licensing charges, and the services of world-class software, user interface, and industrial design departments.

Volume sales of the Touch on the order of a classic iPod would be a massive growth engine for Apple. The company will have proven it can re-make the iPod from a declining business with shrinking margins into another major top-line contributor. Add on the less significant, but still worth mentioning, benefits of a rapid expansion of the iTunes Store (App, Video, Music, etc.) installed base.

More important, the higher-end Touch gained the internal hardware of the 3Gs iPhone, but remained the same price. These changes are lost on consumers, but adding power and sophistication not found outside flagship smartphones threatens countless businesses. Apple also subtly initiated the process of fragmenting their App Market.

The "iPod Touch 3Gs" sprawls into countless business sectors. Pure gaming portables like the PSP must reach for extremely high end components if they remain single-purpose devices and want to command premium prices. Adopting an nVidia or Intel solution, or a custom PS3/Cell derivative, could be a decisive edge, but at a fraction of the sales volume of an iPod, component costs would necessitate taking a loss upfront and recouping profit on games for some time. It is unclear if Sony can build such a device, or afford to subsidize two lines of hardware. Nintendo need not compete on graphics, but a touch screen or other novel control surface is no longer unique to the DSi.

The Touch 3Gs is so powerful and capacious, it could perform the work of an Apple TV, which should intimidate Netflix, Roku, XBox 360, and cable box DVRs. An inevitable camera will add video recording capability, increasing pressure on Flip. Note that none of the non-Flip devices are portable. Imagine bringing everything in your home media center with you besides the TV. Just a threadbare studio with bunny ears becomes a gaming and media suite with a single dock cable.

What of needing WiFi? Read on in my next article to find out how Apple plans to surf their Third Wave.

*The First Wave iPod was the initial two FireWire/"Deck of Cards" line, the dock connector began the Second Wave.