Think of iTunes-capable cell phones as �clones� of the iPod shuffle. Like PC clones in the early days, they will offer true differentiation, in this case, wireless connections. And they will be offered in channels where Apple has no presence today, such as the storefronts of Verizon Wireless, Cingular, and other carriers, which could expand the market. Over time, however, like PC clones in a mature market, they have the potential to cannibalize the originator�s product.
Most of the discussion around cell phone cannibalization focuses on PDAs or digital cameras, but flash-based MP3 players are lower-hanging fruit. In contrast to the challenges of competing with a PDA, there�s no input bugaboo to address; a nine-button keypad is more than accommodating for music playback. And unlike competing with digital cameras, creating an MP3 player is relatively simple and cheap. There�s no need to worry about lenses, sensors, flashes, and other extras far removed from a phone�s core functionality that make a significant difference in picture quality beyond the megapixel count.
Consumers have collectively accepted poor quality pictures from camera phones, but let�s address demand. On one hand, consumers may not want to spend their talk time listening to their downloaded songs. On the other hand, though, the incredible distribution power of carriers and the benefits of integration forgive many design compromises. The flash MP3 market is more vulnerable than digital cameras or even PDAs because, despite all of the media attention around the iPod, the market is less mature.
At Macworld Expo, Steve Jobs showed the crowd the ten millionth iPod that he kept for himself (like he really needs the money from eBay), but it is oft-repeated that more than 600 million cell phones are sold every year. Given that Karl Lagerfeld buys only, at most, three or four million iPods per year, there�s a major threat for digital music players at the low-end of the market from cell phones. A parent leaving a child with a babysitter escapes to the gym. Is she more likely to bring the cell phone that plays MP3s that she got for $50 with her new contract or buy an iPod shuffle?
Motorola is but the first cell phone manufacturers to include iTunes playback software. Observing Apple�s approach with car and aftermarket car stereo manufacturers, we can assume that it is pursuing other handset makers; Nokia for one is probably in no rush to adopt WMA. Apple might even launch a wireless version of the iTunes Music Store that delivered songs over-the-air.
Yet, bundling iTunes with cell phones could cause a backlash. Carriers, which generally dislike being cut out of the revenue loop as much as the local organized crime protection enforcer, may cry foul and pressure handset manufacturers to remove iTunes or insist that it won�t be supported. At this point, though, it appears that even the U.S. carrier most tightly aligned with Microsoft is keeping an open mind.
In another era, after Apple finally experimented with Mac clones from the likes of Power Computing, it quickly reversed course as it recognized that companies with lower costs could eat its lunch in the marketplace. With cell phone manufacturers such as Samsung showing cell phones with miniature hard drives that rival the iPod mini�s capacity, Apple will eventually be tested in its willingness to expand the market for the iTunes Music Store. Cannibalization can quickly make a company sing a different iTune.
Ross Rubin is director of industry analysis at NPD Techworld, a division of market research and analysis provider The NPD Group. Views expressed in Switched On, however, are his own. Feedback is welcome at firstname.lastname@example.org.