The bad news is that the market for MP3 players is shrinking rapidly. Munster cites NPD data that show year-to-year growth in spending on stand alone players falling from from 131% in 2005 to 17% in 2006 and a contraction of -4% in 2007.
saw iPod sale growth rates trail off through 2007, from 50% year-to-year growth in the December 2006 quarter to 5% in December 2007 — the lowest in iPod history. The street is expecting 4% growth in Q2, but given the traditional post-Christmas fall-off in iPod sales, that may be optimistic.
The good news is that Apple’s share of the MP3 player market has remained steady throughout this period (72% of unit sales in ’05 and ’06, 70% in ’07). Moreover, on a dollar-share basis it has been growing, from 71% in ’04 to 84% in 07. During the first month of iPod touch sales, Apple’s dollar share hit an impressive 90%.
What this suggests to Munster is that Apple will have innovate its way out of what is rapidly becoming a replacement market. Like other analysts, he reads much in Tim Cook’s remarks during last week’s earnings conference call, in which Apple’s COO referred to the iPod touch as the beginning of a “mainstream Wi-Fi mobile platform.” Munster writes:
Using iSuppli data, Munster estimates that it costs Apple $15 to add a Wi-Fi radio to an iPod and roughly $30 to add a multi-touch screen. And what could you do for that extra $45? Among other things, says Munster, you could buy lattes: