When the first Apple (AAPL) iPod music player came to market about six years ago, it was unusual for a variety of reasons, but chief among them was the fact that it used a hard drive. Though the market for MP3 players was still in its infancy, most instead relied on flash memory chips rather than hard drives to store their music.
Apple, of course, went on to change the music player business—and the music business itself—over the course of the next few years. IPod models multiplied, evolving into today's five-device lineup: the shuffle, nano, classic, touch, and iPhone.
But now evidence is mounting that hard drive-based iPods may be on their way to extinction. At least that's one conclusion you might draw from an analysis of the components inside the latest iPod classic (the sixth iPod model to feature a hard drive) by market research firm iSuppli.
Unveiled by Apple (BusinessWeek.com, 9/6/07) Chief Executive Officer Steve Jobs on Sept. 5, the classic is largely unchanged from the two-year-old model it replaces, the first to support video (BusinessWeek.com, 10/13/05). The one major change is storage capacity. The top-of-the line classic tops out at 160 gigabytes, double that of the previous top model.
Apple's new focus on video content—four models now play video and the iTunes store has been selling downloadable TV shows and movies for about two years—raises an interesting question. Why isn't the iPod with the biggest and best screen, the iPod touch, also the one with the highest storage capacity? While the classic comes in models with 80 GB or 160 GB of storage, the touch uses flash memory chips and comes in capacities of just 8 GB and 16 GB. "It seems odd to me to that Apple didn't take the best display and the highest-capacity hard drive and combine them into a single product," says iSuppli analyst Chris Crotty.
One reason that Apple appears to be veering in this design direction, accepting lower storage capacities for now on all but the classic, is the downward trajectory of flash memory prices.
Based on iSuppli's teardown analysis, the 80-GB hard drive in the new classic costs Apple $78, or roughly the same cost as the 30-GB drive in an iPod two years ago. But while hard drive costs are falling, flash memory prices are declining even more steeply. The 8 GB of flash inside a new nano now costs Apple about $48 (BusinessWeek.com, 9/18/07). That's only slightly more than half as much as flash memory cost just a year ago, and a little less than a mere 2 GB of flash fetched two years ago.
Assuming these trends continue, Apple would be able to put 128 GB of flash into an iPod for roughly the same cost as today's 8 GB within three years, says iSuppli analyst Andrew Rassweiler. Since the other three iPod models and the iPhone are already flash-based, the classic seems sure to follow that path. "Apple is still making the hard drive-based player because there's still a business case for it," he says. "But it's pretty clear that the writing is on the wall, that the hard drive-based product is going to be marginalized."
That's going to be bad news, of course, for suppliers of hard drives, notably Seagate (STX), a regular iPod contributor. Though Samsung and Toshiba (6502.T) both supply iPod hard drives, both companies also make flash chips for the other iPod models, suggesting they would generate new business if Apple goes all-flash with its iPod family.
Flash memory is also more efficient when it comes to power consumption. Hard drives have to spin, and thus require power-hungry motors to make them move. As it is, Apple has slowed down the rate at which the hard drives on the iPod classic spin, an apparent nod to power efficiency, Rassweiler says. While it can still technically spin at 4,200 rotations per minute, the same as on the previous model, the drive in the classic has been deliberately slowed down to run at 3,600 RPM, he says.
Overall, the components in the new 160-GB iPod classic cost about $190, or slightly more than half the retail price of $349, according to iSuppli's teardown analysis. Similarly, the 80-GB version, which sells for $249, has a component cost of $127. These costs do not include Apple's expenses for development, assembly, packaging, and marketing. iSuppli expects Apple to sell about 3.1 million classics during 2007 and another 3.5 million in 2008.
Samsung retained its position as Apple's main iPod component supplier. The same Samsung chip running audio and video features in the iPod nano is also used in the classic, supplanting chips that had previously come from Broadcom (BRCM) and Nvidia unit PortalPlayer (NVDA). Samsung also provided the hard drive used in the unit taken apart in iSuppli's analysis, though Seagate and Toshiba drives are likely to be found in other classics since Apple prefers to buy its components from multiple suppliers. Finally, Samsung is also supplying memory chips for the classic. Combined, the Korean company supplies $92.40 worth of components, or 73% of the total, for the 80-GB classic iSuppli analyzed.
ISuppli also found that Wolfson Microelectronics, long the supplier of an audio chip, known as a codec, for Apple's entire iPod family, was missing in the classic it tore down, though it's possible that Wolfson is still supplying it for the classic line. Instead, the codec chip came from Cirrus Logic (CRUS). NXP Semiconductor and Linear Tech (LLTC) both appeared to hold on to their slots as suppliers of power-management chips, while Intersil (ISIL) is suppling a video-driver chip that Apple also uses in the nano.