Apple announced their financial results today, and they’re impressive for the most part: a $1.58 billion profit on $9.6 billion in revenue. Think about that. Not long ago Apple couldn’t even pull in $9.6 billion in a year; now they can do it in a quarter. My, that’s quite a change.¹

There is one thing that everyone seems to be talking about: iPod sales were up a wimpy 5% year-over-year.

OMG!!! T3H I-POD IS DOOMED!!1!!1!1!1!!!

Or is it? Is there really something to this relatively small sales increase? Is it a sign that the iPod has lost its luster and will now begin to fall? Or is something else in play here?

Consider this...

Apple sold over 2.3 million iPhones last quarter. Apple also sold over 22 million iPods last quarter.

Are other music players finally gaining ground?

The answer is no. 

During the financial results conference call, Apple CFO Peter Oppenheimer noted that, according to data from NPD, the iPod’s US market share in the October-December quarter was “consistent” with the same period in 2006 (although Apple said it is gaining share in international markets). In other words, there was no real change in Apple’s US market share. It’s possible that there was a slight loss (or slight gain), but such variations don’t mean a whole lot unless a trend starts to develop over consecutive quarters. 

To me, this is telling. To me, this says that it isn’t so much that the iPod is failing or losing ground, but that the market for MP3 players simply isn’t growing as quickly as it has in the past. Why is this?

It’s the economy, stupid.

No doubt about it, the US economy is hitting a rough patch, what with the whole subprime mortgage mess, rising energy costs, and various other issues. So it’s possible that, given the soft economy, some people simply aren’t buying as much. Considering Apple’s strong Mac and iPhone sales, though, I don’t know how big a factor the economy really is in this regard. It’s possible that computers are viewed as a necessity whereas iPods are seen as toys, thus any decline in sales of necessities will only come if/when the economy softens further while sales of toys will decline/slow first. It’s possible, but I’m not entirely sold on this idea.

The market is saturated. Like a sponge.

It’s quite possible that the market is saturating. There’s only so long 30-50% year-over-year sales growth can be sustained before the demand starts slowing. Anyone who thought that such astronomical annual sales increases could be sustained indefinitely simply were not being realistic.

The iPhone effect

I think that the iPhone--and other smart phones--may have played a part to an extent. I mean, if your cell phone contract is up and you are in the market for a new iPod, why not get both a new phone and a new iPod by buying an iPhone? Last quarter, Apple sold about 2.3 million iPhones. What if half a million iPhone buyers opted for a new iPod instead?

In the conference call, Oppenheimer and Apple COO Tim Cook noted that they haven’t seen any signs of cannibalization in Europe, it was hard to say in the US. So chalk this up as a big fat maybe.

What does that spell?

A little of everything! My money’s on market saturation as the biggest cause, though, at least in the US. I mean, take a look around when you’re riding public transit, and you’ll probably see those dang white earbuds all over the place. It’s easy to conceive that most people who want iPods have them, and that most iPods sold from here out will be to replace older iPods. We’ll see how this all pans out in the coming months, but for the time being, this relatively slow growth isn’t something to lose sleep over.²

Full disclosure: The author owns a small stake in Apple Inc, which was not a factor in the writing of this article. So there.

¹ Thanks to the US Presidential election, I predict that “change” will be chosen as the Word of the Year for 2008.↩

2 And yet here I am writing this at 2 AM. Go figure.↩