iPods priced for profit, not market share

iPods priced for profit, not market share

TAIPEI (09/18/2006) - Apple Computer Inc.'s recent introduction of several new iPods shows the company is looking for better profit margins, not gaining market share, according to researcher Gartner Inc. And the move could boost its rivals.

The top sign Apple is going for the green is its lack of aggressive pricing, according to Gartner analysts Joseph Unsworth and Jon Erensen in a Monday report. The second-generation iPod Shuffle, for example, could have been priced closer to US$49 to stimulate demand from users, since the cost of materials going into it amounts to only $30, the analysts said. Instead, the shuffle is priced at $79.

The company could have also priced the new 8G byte product lower than $249, since its materials only cost $130, Gartner said, the same with its 4G byte, which at $199 is far higher than the $90 worth of materials inside, and the 2G byte version, which is $149 and is made from materials costing only $70.

The two Gartner researchers even lamented Apple's decision to discontinue the 1G byte nano, which they say could have been a nice mass-market item for around $99.

"Apple is in a secure position atop the portable media player market and has decided to strategically focus on its margin this time," the analysts said.

Indeed, Apple continued to lead the U.S. digital music player market in the second quarter with a 75.6 percent share, according to the NPD Group, followed at a very distant second by SanDisk Corp. at 9.7 percent and Creative Technology Ltd. in third with 4.3 percent of the market.

But a lack of revolutionary new functions in the latest lineup of iPods coupled with just a small price reduction could give rivals, Microsoft Corp. and its new Zune in particular, room to gain market share this year.

For one thing, Apple's rivals may not be affected by strained component supplies, since Apple won't be taking as much as it could, according to Gartner. The market researcher had predicted a shortage of NAND flash memory chips in the fourth quarter due to strong sales of portable media players, USB (universal serial bus) flash drives and other products requiring the chips. While it still forecasts a shortage, the situation won't be as severe as previously thought, the analysts said, perhaps a 3 percent shortfall rather than the 4.6 percent shortage originally predicted.

NAND flash, one of the key data storage components for iPods, is 60 percent cheaper than last year on average, and with Apple's huge investment in NAND companies, it could have priced its iPods more aggressively to keep its market share, the analysts said.

In addition, Apple's rivals won't have to work so hard this year to keep up with the iPod because the new lineup does not redefine the portable media player market like it did last year, Gartner said. And finally, the company only trimmed nano prices by $50, different from the past when the company's aggressive price cuts forced competitors to lower prices and increase storage capacity to compete.

Jill Than, a spokeswoman for Apple in Hong Kong, declined to immediately comment.

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