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Beating the iPod Crunch

With the holiday shopping season at hand, two truths are swiftly emerging about Apple's iPod digital-music player. First, the product is going to be a gigantic hit. Second, there are going to be shortages.

The only question is how big the shortfall will be. Some retailers contacted by BusinessWeek Online say they're getting far fewer iPods than they requested -- in two cases, fewer than half of their weekly orders. Also, retailing giant Circuit City (CC) expects demand to outstrip supply through the end of the year, though a spokesman wouldn't say to what degree.

And Apple Computer's (AAPL) announcement that it would invest $1.2 billion to lock up supply of flash-memory chips from suppliers -- including a new, three-year joint venture between Intel (INTC) and Micron Technology (MU) -- has some analysts worried about its ability to make enough iPods to satisfy runaway demand in the near term before additional capacity comes online. Indeed, Toshiba (TOSBF) Chief Executive Atsutoshi Nishida says that "unfortunately, we're not able to satisfy 100% of Apple's requirements" for flash chips.

NO BLITZ YET. So how bad will the shortages be? Because Apple is so private, it's almost impossible to know for sure. But it could impede Apple from meeting Wall Street's more optimistic projections. Investors are expecting a huge quarter for iPod sales. The share price rose to a record on Nov. 17, when Bear Stearns analyst Andrew Neff predicted Apple would ship 14.1 million iPods in the December period. That's nearly half of the total shipped since the product debuted in late 2001.

Shoppers are almost sure to feel the sting as well, especially on red-hot products like the black 4-gig nano and possibly for both versions of the video iPod, including the 30-gigabyte and 60-gigabyte models. "If you want to get an iPod for someone this Christmas, I'd advise you to get it now -- if you can find one," says Scott Anderson, merchandising manager for online retailer Crutchfield.

That's certainly doable at this stage. Many of Apple's own retail stores are well-stocked, and sales of flash-based iPods -- which includes the nano and the lower-end iPod shuffle -- have increased at other retailers in recent weeks, says NPD Group analyst Stephen Baker. The trouble is, however, that the real buying blitz hasn't yet begun. "As of right now, they're doing a great job of meeting demand, but we're not going to really know how they did until Dec. 25," says Piper Jaffrey analyst Gene Munster.

"STAGGERING" DEMAND. Given the sky-high expectations, even some bullish analysts think production may come up short. Because of tight supply of flash memory, it's inconceivable that Apple can ship 14.1 million units, Munster says. In fact, he's considering lowering his current projection of 9.1 million total iPod units sold for the quarter, due to concerns that Apple won't be able to hit his forecast of 5 million iPod nanos. Neff of Bear Stearns didn't respond to a call seeking comment.

Analysts and retailers are wondering how much revenue Apple will end up leaving on the table. Even Apple doesn't seem to know. The company declined to comment for this story. The most recent perspective it gave on the subject came from Apple Executive Vice-President Tim Cook during a conference call discussing last quarter's results (see BW Online, 10/12/05, "Apple: Unexceedable Expectations"). "Frankly speaking, the demand for this product is staggering," Cook said on Oct. 11. "At this point, I can't project when supply will meet demand."

Retailers know this all too well. "All iPods are in very tight supply, and Apple isn't filling 100% of its orders from us by any means," says Charlie Tebele, president of Manhattan-based RCS Experience. And Crutchfield's Anderson says Apple typically ships less than 30% of what the retailer requests each week. The Charlottesville (Va.)-based company put in an order for $3 million worth of iPod nanos after the product was released, and the order still hasn't been nearly filled. It currently has $4 million of all iPod models on order.

BAD BLOOD. Retailers are thrilled to have a runaway hit -- especially since each iPod sold typically results in sales of accessories that can carry profit margins of 70% or more.

Still, iPod-mania is stoking some long-standing tensions between Apple and its retailers. That's in part because Apple pays far lower commissions on sales of iPods than its rivals do on similar products. Also, iPods are now available in thousands of stores, including RadioShack (RSH) and even Tower Records. That makes it even more difficult for any chain to drive much traffic versus its competitors.

"Distribution is almost as wide as you can get," says NPD's Baker. "There's not a lot of retailers that are in anyway connected to electronics that aren't selling iPods."

For retailers, the shortages exacerbate problems created by Apple's refusal to provide detailed information on future deliveries. Most consumer-electronics suppliers typically let retailers know, on a weekly basis, how many units they can expect to receive in each of the next 13 weeks. According to sources, Apple only gives a heads-up of a week or two.

BUY FROM US? That makes it very difficult for the retailers to plan inventory and marketing. Two retailers, for instance, say that Apple doesn't seem to even consider their orders, instead determining how many iPods to dole out based on past sales patterns. "They go by what you've sold in the past year, not what you think that number will be going forward," says one retailer.

Making matters worse, the stores worry that Apple is keeping stocks of hard-to-get products to sell in its own 132 retail outlets. Says RCS' Tebele, "There's no doubt that whatever their intention is, the reality is that at the end of the day, if a retailer is out of stock and they're in stock, it gives the customer the perception that if they want a hot product they'll have to go to an Apple Store to get it."

None of the half-dozen retail and online sites contacted on Nov. 21 had all versions of the iPod nano and video iPod, and none had stocks of the black 4-gigabyte iPod nano. But Apple's online store promised to ship out all models out within a day.

GRUDGING ADMIRATION. Of course, a hot product trumps hurt feelings in the retail game, and retailers will surely buy every last unit they can get their hands on for the rest of the year. "It's a Cabbage Patch Kid phenomenon," says Crutchfield's Anderson, who saw an order of 365 iPod nanos evaporate in less than a week.

And even though many retailers would like nothing better than to see another brand of MP3 player catch fire with consumers, so far that's not happening. Rather, it seems that many people are choosing to pay $50 or more extra for a video iPod, rather than go with a rival offering, when they arrive at a store to find it has no nanos.

"It's frustrating at times to be a retailer," doing business with Apple, says Tebele. "But as a businessman, I can only admire what they're able to get away with." Apple can only hope holiday gift givers are as forgiving.


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