How Does Apple’s New iPod Impact Wireless Carriers and Handset Vendors?

by By Avi Greengart
Principal Analyst, Mobile Devices
October 20, 2005

First Apple overshadowed the debut of Motorola’s iTunes-phone, the ROKR, with the simultaneous introduction of the tiny, beautiful nano. Then, only a month later, Apple replaces its iPod photo line with a new model that plays video. A video iPod doesn’t seem like something that affects sales or design of phones unless you subscribe to the Limited Wallet Theory of Consumer Electronics (“consumers can only buy so much stuff, so if they buy an expensive iPod, they can’t also buy an expensive phone and data services”). However, even acolytes of the Plastic Theory of Consumer Electronics (“consumers will just put the other thing on the credit card, too”) must stop to consider that wireless carriers were promoting that their shiny new gadget-phones are perfect for playing short videos. Won’t somebody please tell Steve Jobs to slow down?

Despite the launch of the Motorola ROKR and competition from other music-capable phones, the market for digital music players is dominated by Apple’s line of iPods, which hit every significant price point from $99 to $399. When the user experience is done right, as is the case with the ROKR and Sony Ericsson’s Walkman phones, converging voice and music provides the benefit of a single set of headphones and call answering simplicity. However, the nano is both so small and so well designed that combining one with a good cell phone is often a better choice. With 2 or 4 GB of capacity, the nano provides all the music most people need. As such, it will remain the volume seller in the music device category despite the addition of video to the higher capacity iPods.

The nano also explains why Apple had to finally add video to the iPod: at this point, consumers new to digital music players will buy the shuffle or the nano. Apple needed a reason to prod newbies to buy the higher capacity line, and spur upgrades among the converted. Yet, rather than create a video iPod, Apple maintains the focus squarely on music by limiting the screen size to just over 2 inches diagonally. This choice, perhaps reflecting the paucity of video content, gives Apple’s video device competitors – and Microsoft, CinemaNow, and MovieLink – a very small window to build a competing video infrastructure before Apple offers full length movies, the portable video holy grail. Surprisingly, Pixar (also headed by Steve Jobs) is not offering its movies for sale on ITMS yet – perhaps because Disney owns the distribution rights, or because they are holding out for a true video-first iPod. Apple has the infrastructure in place. All it needs now are agreements from the studios, and video-first iPods could be readied to provide a larger screen experience.

The problem with mobile video has always been enabling the content side with access to movies and children’s video. The demand is clear, as evidenced by the number of portable DVD players sold, whether stand alone, or integrated into minivans and SUVs. Microsoft failed with the PMC because the devices did not play movies and required the consumer to already own an XP Media Center PC used as a DVR. The devices themselves were either elegant or had decent battery life, but not both. Sony has also gotten some studios to offer prerecorded content on UMD for the PSP, but it is far from clear whether this is sustainable.

For wireless carriers and handset vendors, the challenge will be – once again – to offer a better converged voice experience than the best of breed approach of buying an iPod and a phone. Thus far, only Nokia has shown a (delayed, and likely expensive) N91 music phone that bettered a phone plus an iPod mini; in the meantime, the nano changed the form factor expectations. Verizon Wireless has been offering music video downloads to its portfolio of VCAST (EV-DO) phones; the video quality is only fair when compared to a 320x240 version on an iPod. The real competitive threat that ITMS poses is by exposing VCAST’s incredibly limited lineup: ITMS has 2,000 music videos at $1.99 each. VCAST offers exactly 7 for $3.99 each.

All is not lost for carriers and handset vendors who want to build converged handsets and services. Apple still does not offer music subscriptions or satellite radio on its devices. Live television is another area where carriers can build a sustainable lead. Apple is unlikely to buy or license spectrum for broadcasting both because it doesn’t fit the company’s business model, and also because we’ve heard that – seriously – Steve Jobs doesn’t watch television.

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