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iPod: Leader, but Not Ruler

By Alex Salkever With iPod mania running full tilt, many people assume that Apple (AAPL) utterly dominates the markets for digital-music players. And that includes Apple itself. "In the biggest markets we're...40% to 50% of the market share of all MP3 players. That includes flash and hard-drive players," said Apple sales chief Phil Schiller during a May 14 Merrill Lynch conference call. He also claimed that iPod sales outstripped the combined sales of the competitors in second, third, fourth, and fifth place. "Our market share is tremendous," Schiller gushed.

Apple officials are careful to state that they're referring only to markets in the U.S., Japan, and Western Europe, where they believe they have good tracking data. Although no one monitors overall international numbers, most analysts have assumed Apple has well over 25% of worldwide digital-music player sales. They base that view on Apple's strength in those three key markets.

Too bad their assumption is off base: The iPod's global market share may actually fall well below the 25% mark.

COLD WATER. Very little good data exists on international sales of consumer electronics -- digital-music players included. With the exception of Japan, information out of Asia is sketchy. By some estimates the Chinese market for digital-music players hit 1.8 million units in 2003, but given the chaotic nature of the Middle Kingdom's economy, that number could well fall short. Good sales data in Latin America, Eastern Europe, India, South Korea, and Taiwan remain hard to come by.

So companies put together piecemeal estimates of their global market share. And they rely on information collected by researchers such as NPD Group, which tracks U.S. retail sales of consumer electronics.

That's one way to get a handle on market share. Another is to ask the folks who make the components that go into digital-music players. A number of outfits specifically sell chips targeted at digital-audio devices. They consume less power than chips used for audio playback in cell phones or PDAs and are far more sophisticated than the relatively crude chips in CD players. Their makers include Texas Instruments (TXN), Phillips, and SigmaTel (SGTL), the market leader in terms of unit sales. Another strong competitor is PortalPlayer, the supplier of chips that run the iPod.

LOOKING ABROAD. According to one of those chipmakers and to industry analysts, worldwide shipments of digital-music-player chips hit about 15 million last year. An April, 2004, report from investment bank CIBC on this market estimated global sales of flash and hard-drive music players at 17 million. If that's true, then the 1.5 million iPods sold in 2003 gives Apple 8% to 10% of the global market. In fact, SigmaTel alone sold 9 million chips specifically designed for rival digital-music players, dwarfing iPod sales.

True, most of the players counted in these tallies were cheaper units that use solid-state flash memory, rather than higher-capacity hard drives. So, total revenue from iPod sales, running at close to $1 billion on an annual basis, certainly accounts for more than 10% of the total for digital-music players. Further, Apple hasn't pushed nearly as hard to enter international markets with the iPod as some of its competitors. Steve Jobs has yet to truly attempt to take on China, for example.

It's also important to note that sales of iPods are growing more quickly than the overall digital-music-player market. The CIBC report estimates that unit sales of flash and hard-drive players will grow 85% in 2004, to 31.5 million. Apple sold just over 800,000 iPods in its second fiscal quarter, ended Mar. 27 -- usually its slowest quarter. So even if Apple only matches the 800,000 number for the next three quarters, it will sell 3.2 million iPods. This represents a 113% growth rate and a world market share of just over 10%.

COMPETITION RISING. I'm fairly certain that Apple will sell more than 800,000 players in the next holiday season. Indeed, a hot Christmas run could easily double that number and put iPod sales over the 4 million mark for 2004. That would amount to a global market share topping 12%. Apple declined to comment on the record for this story. Sources close to the company say they don't believe the size of the international market is as large as I'm suggesting and that the iPod's global market share is significantly bigger than what I calculate here.

So what does all this mean? While Apple's is the biggest single player in both the domestic and global markets, it remains far from dominant. Further, the surprisingly high sales numbers for digital-music players outside the U.S. implies that Apple will be facing tougher competition in the not-so-distant future, as it ramps up to sell iPods where competitors are on much stronger footing.

Particularly in Asia, where size really does matter, Apple might have trouble selling its larger and more expensive iPods against rivals with smaller devices. Sure, the iPod mini should thrive in these markets. But Apple will have to overcome production constraints in the mini's tiny 1-inch hard drives before sales can go truly global. Makers of these new drives have struggled to eliminate production errors and have had difficulty keeping up with demand.

The upshot: The iPod is clearly the market leader in digital-music players. And it's certainly the coolest in the pack. But a quick look at the big picture shows that Apple has yet to achieve dominance in the sector, despite the hype. Salkever is Technology editor for BusinessWeek Online. Follow his Byte of the Apple column, only on BW Online

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