Deceptively viral Nano

The conventional wisdom is that the iPod is on its way out. Units sales in Apple’s 4th quarter were down 8% YoY, and the fall iPod refresh was disappointing. One could easily conclude that Apple has given up on the product line and was milking it until end of life.

This is certainly evident at both ends of the product family. The classic iPod — hard disk based — is a tiny niche that is going away. The Shuffle is already about as small as it’s going to get, and there are limits as to how many people want a player that offers no control over what you hear.

The iPod Touch is deliberately crippled — if it’s too attractive, it will cannibalize iPhone sales. Perhaps that is why Apple didn’t update the iPT this year — except for larger memory sizes — despite pent up demand for a new model. It could also be (as rumored) there were production delays on a planned new model.

From a strategic standpoint, however, I think the iPT is in a decline. My interpretation is that the main goal of the iPT is to expand the platform installed base to include people who won’t sign up for a carrier (such as AT&T) or won’t switch carriers. (Since almost every sentient human being in the developed world has a cellphone, the latter is a larger category.)

However, Apple now has multiple carriers in Europe and Latin America. This leaves mainly the US as the market for the iPT for the majority of the market that doesn’t or won’t use AT&T. (Apple also has single carriers in Japan and China, but the lukewarm reception for the iPhone does not suggest a lot of pent up demand to shunt to the iPT). So I think over time the pool of people who want the iPhone but won’t/can’t buy them is continuing to shrink.

For the iPod product line, that leaves the iPod Nano. I must admit, I underestimated the potential for the iPod Nano 5G, which seems like an overpriced Shuffle with a screen. In particular, the video camera seems like it offers a ubiquitous recording device for those carrying a music player but not a cellphone.

In short, the product is well-targeted to tweens and young teens from families that will spoil them with a one-time $150 purchase but not an $800/year iPhone service plan that doesn’t even include many text messages. Enough Nanos are out there that (affluent) kids know about it and how fun it is. I’m getting pressure at my house from a 6th grader, pressure we hope to resist.

An additional push is coming from the world’s largest retailer. Starting today, Wal-Mart is selling the $150 Nano for $145 with a $50 iTunes gift card. (The same Nano is $134 at Amazon without a gift card). I can’t tell if this is an aggressive effort to build traffic — and Apple to support iPod sales — or it’s Apple dumping inventory that otherwise wouldn’t be selling.

Given this, I expect most of the iPod sales reported in quarter ending Dec. 26 to be the Nano. Will iPod sales be as good as last year? Certainly not in dollar terms — when more iPod Touch models were sold — and I’m guessing not even matching the 22.7 million iPods sold last Christmas.

Still, as a starter iPod (gateway drug), the iPod Nano will add new young customers to the iTunes Store and iPhone/iPod ecosystem. Building brand and product loyalty among pre-teens is clearly crucial for Apple as iPhone challengers continue to flood the market.