Apple’s Nano

3 Oct 05

Apple Computer introduced two products on September 7^th.  First, Steve Jobs unveiled Motorola’s new ROKR phone, which combines the iPod shuffle with a Motorola mobile phone.  Jobs dutifully noted that the sound quality was very good and made a phone call with the phone. 

After performing his product introduction duties for Motorola, Jobs reached into the front pocket of his black jeans and pulled out a small, flat metallic rectangle.  The audience gasped and burst into applause, and the camera zoomed in to Jobs holding the new device.  “This,” Jobs announced dramatically, “is the iPod Nano.”

Steve Jobs and Apple iPod Nano

“iPod nano is the biggest revolution since the original iPod.  iPod nano is a full-featured iPod in an impossibly small size, and it's going to change the rules for the entire portable music market."

Apple CEO Steve Jobs, 7 Sep 05

Reviews of the Nano have been uniformly positive.   For example:

“Apple’s market share [in music players] won’t stay at 80 percent … it’s about to go up. … to see [a Nano] is to want one.”

 David Pogue, The New York Times, 15 Sep 05

            The Nano is more than another new product – it replaces one of Apple’s major profit generators, the iPod Mini.  As of 7 September, you can no longer buy a Mini from Apple.  The transition alone is quite a challenge – Apple plans to replace the Mini with the Nano, keep profits high, and still surprise and delight its customers.

The Nano should be an even more profitable product for Apple than the Mini (which is why the Mini is being replaced).  Apple was making about a 44% margin before marketing and distribution costs with the Mini, according to market research firm iSupply.  Nano margins will run at about 50 percent.  

Apple achieves these margins because of the volume purchases of flash memory it’s made from Samsung, the world’s largest flash memory provider.  According to estimates in The New York Times, Apple committed to buy 40 percent of Samsung’s flash memory output this year, in exchange for a price discount of about 30 percent.

After selling 40 percent of its output to Apple, Samsung doesn’t have much more to sell.  This makes it extremely difficult for other music player companies to compete with the Nano.  Already, one of the pioneers in music players, Rio, has pulled out of the business.

The Nano is an ambitious and effective product launch for Apple.  It simultaneously:

1.            Moves the critical mass of iPod sales to a new storage technology, flash memory;

2.            Raises Apple’s margins; and

3.            Makes it very difficult for most competitors to enter with similar technology, as Apple has locked up critical component supplies. 

"How do you compete [with Apple] if you can't get the memory you need? And even if you can get it, you're not able to sell the volume needed to negotiate a better price."

iSuppli Analyst Chris Crotty in Business Week, 22 Sep 05

While the Nano looks like a sure winner for Apple, the company still is taking a number of risks. 

First, there’s implementation risk – can Apple deliver this new product in bulk without quality problems?  There are already some problems with the Nano’s color screen, which Apple has acknowledged and is fixing. 

Second, there’s market risk – Apple is betting that consumers will want to buy this new technology toy.  David Pogue and other tech reviewers are in love with the Nano, but there’s no sure thing in consumer electronics.

(Personally, I expect that this will be a big hit as well, but that’s for another update…).

And the winner is …

Samsung is the biggest winner in the Nano launch.  First, Samsung gets a dedicated customer regardless of customer demand.  No matter what happens, Apple is committed to buying 40% of Samsung’s flash memory output. 

Second, it can expect to sell the remaining output of its flash memory at higher prices, at least until new capacity is available, since Apple’s Nano is absorbing much of the existing supply.

Finally, Samsung becomes one of the few consumer electronics companies that can compete with Apple in the music player market.  Because Samsung manufactures both the flash memory and the music player, it has access to flash supply that other companies, like Rio or iRiver, do not. 

Samsung’s YP-T8A

2GB Flash Mobile Player

       Apple will lead the way in flash music players, and its supply agreements will make competition difficult for companies like Sony.  Where Apple leads, we can expect Samsung to follow.  And soon.

More Information:

1.                          The cost comparison of the Nano and the Mini from Business Week, 25 Sep 05.

2.                          My 2003 Update on Samsung

3.                          My 2003 Update on Apple iPod

4.                          New York Times story on Samsung supply of flash memory for the Nano.