By John Gruber
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Apple’s just-announced Q1 2008 results made for the best quarter in company history:
The Company posted revenue of $9.6 billion and net quarterly profit of $1.58 billion, or $1.76 per diluted share. These results compare to revenue of $7.1 billion and net quarterly profit of $1 billion, or $1.14 per diluted share, in the year-ago quarter. […]
Apple shipped 2,319,000 Macintosh computers, representing 44 percent unit growth and 47 percent revenue growth over the year-ago quarter. The Company sold 22,121,000 iPods during the quarter, representing five percent unit growth and 17 percent revenue growth over the year-ago quarter. Quarterly iPhone sales were 2,315,000.
Five percent year-over-year unit growth for iPod holiday sales is a clear sign that iPod unit sales growth is no longer explosive; last year’s unit sales number for the holiday quarter (21 million) was 50 percent higher than the previous year’s. Expect to see this number get jumped on, like it was by Dan Frommer at Silicon Alley Insider, who writes, “The iPod, which helped Apple revive its fortunes just five years ago, is on its way out.”
But here’s the thing: iPod revenue growth continues to grow at about the same pace. Last year, iPod revenue was up 18 percent over the previous year; this year, it was up 17 percent. Think about that: a year ago, iPod unit sales were up 50 percent but revenue was up just 18 percent; this year, unit sales are up just 5 percent but revenue is still up 17 percent. (Compare and contrast to Apple’s Mac hardware sales, which are up 44 percent in units and an almost identical 47 percent in revenue.)
How do you grow revenue faster than unit sales? By selling more iPods at the high-end of the product line. Hello, iPod Touch.
Look at the numbers and it breaks out like this: last year, Apple booked $163 in revenue (not profit) per iPod sold; this year, the number was $181. The conventional wisdom, for years, has held that the problem Apple faces in the iPod’s market is that even if they manage to hold on to a large market share, the entire market is destined for commodity status — music and video players are going to get cheaper and cheaper every year, Apple is going to face increased competition on price, and the players Apple does sell will have to be cheaper as well. Think about what happened with, say, Sony’s Walkman, which debuted at a high price in the late 70s but within 20 years was selling for $30.
What this line of thinking misses is that it’s wrong to think of the iPod simply as a digital Walkman. Better to think of the iPod as, say, “the best pocket-sized anti-boredom device Apple can make”. In 2001, that device was a simple hard-drive based 5 GB MP3 player. Today, it’s the iPhone and iPod Touch.
Speaking of the iPhone, Apple sold almost exactly the same number of iPhones as Macs: 2,315,000 vs. 2,319,000. That’s impressive in and of itself. For comparison, Apple sold 1,119,000 iPhone during the preceding (debut) quarter. The price drop and expanding into non-U.S. markets certainly helped drive that growth, but it’s worth noting that many iPhone doubters dismissed the initial demand as nothing more than proof that Apple could sell iPhones to fanatics willing to wait in line on the opening day. I don’t see how anyone could doubt that the iPhone is a smash hit at this point.
But here’s the other thing: Apple’s completely separate accounting for the iPhone and iPod Touch is merely an accounting distinction. In practical terms, they constitute a single software platform, that of the touch-screen based “OS X” that doesn’t really have a name. Apple doesn’t break down iPod sales by model, so we don’t know how many iPod Touches Apple has sold. But, presumably, that number is quite a bit larger than 4,000, and so thus, even in a quarter with 44 percent higher year-over-year Mac unit sales, Apple sold more “Mobile OS X” (if you will) devices than Macs.
The market for third-party software for the iPhone and iPod Touch is already big, and I expect that by this time two years from now, there will be more iPhones/iPod Touches in use than Macs. (Imagine the unit sale numbers for a $199 iPhone two years from now.)
And one big difference, from Apple’s financial perspective, between the Mac and upcoming iPhone/iPod Touch software markets is that Apple will get some sort of cut from every app sold — assuming it works the way I expect it to, where approved third-party apps will be sold through the iTunes Store.
This is a potential gold rush for indie Mac developers.
The other number from Apple’s data summary which indicates that Apple’s music-and-video business is thriving is the revenue growth for “Other Music Related Products and Services”, which is up 27 percent year-over-year. Apple says this category consists of “iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories.” 27 percent growth sounds pretty damn solid for the four-year-old market-leading music store. I’m happy as hell to see the Mac numbers growing, but the plain truth is that the Mac clearly has a ton of room to grow — the iTunes Store’s 27 percent revenue growth strikes me as at least as impressive as the Mac’s 47 percent.