iPod: $7.4 Billion-a-Year Gateway Drug for Young Apple Users - YCharts

by Emily Lambert August 01, 2012

The iPod, which Apple (AAPL) introduced in October 2001, is looking increasingly obsolete in the iPhone world. Shoppers don’t need to buy separate music players when their smartphones can play music, too. Last year Apple sold 42.6 million iPods, down 15% from the year before. Sales from those came to $7.4 billion.

It would seem those sales will disappear, putting pressure on Apple’s all-important profit margin, right?

AAPL Profit Margin data by YCharts

Maybe not. Because there's a crucial group still buying iPods: Parents.

Kids love Apple gear, which I say with conviction. My 2-year-old son can use an iPhone. On an iPad, he knows how to Skype, find Sesame Street games and YouTube. He throws fits when we take the iPad away.

Mattel (MAT) and other companies are trying to create digital toys for this group, but if it’s not Apple, my boy doesn’t care about it. A Samsung smartphone? Even that doesn’t get the same interest. In a few years, once he’s old enough to stop chewing on earbuds, I'll probably get him an Apple gadget of his own.

That’s why although interest in iPods is waning, it’s not going to disappear. Last quarter, iPod unit sales were down 10%, but revenues on those were down 20%. That would indicate Apple has been dropping prices, bringing them to a level where an iPod is no more expensive than a trip to the zoo. And in doing so, it is creating a new generation of loyal Apple customers.

AAPL Revenue TTM data by YCharts

When a kid has an iPod, he’ll want to synch it with an iTunes account to hear the latest Wiggles song or, god forbid, Taylor Swift album. Depending on the model, he may want to keep some photos on it, watch Thomas the Train, record videos or play games. He’ll need a case to protect the thing from inevitable falls and bangs.

Way back in 2009, some analysts recognized that iPods were part of an Apple indoctrination. Some called the iPod touch the iPhone on training wheels. A November 2009 report from Flurry compared iPods to McDonald’s (MCD) Happy Meals and said, “Apple is using the iPod touch to build loyalty with pre-teens and teens.”

That clearly worked. On an Apple discussion board, a mom posting in December 2010 said she bought an iPod for her 6-year-old’s birthday because she “was tired of her taking mine to play games and listen to music.”

Last November, an article on About.com suggested buying an MP3 player for “your favorite child. The Apple iPod shuffle is an inexpensive, easy to use and colorful MP3 player that is great for small kids.” Added bonus: the iTunes store has parental controls.

Last year, a Nielsen survey showed that among kids 6 through 12, 30% of them wanted an iPod touch, making it the second-most wanted gift for the holidays.

The only thing to beat it: the iPad. Last year iPad sales were up 311%. I'd love to know how many of those buyers once owned an iPod.

Emily Lambert is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

Apple Inc. is rated Neutral. Mattel Inc. is rated Neutral. McDonald's Corporation is rated Neutral.
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