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Three Reasons Why the iPod Still Matters

This morning I got an interesting reply tweet from a friend: “Can you imagine someone saying in ’07, “In 3 years nobody will care about iPod sales.”

Source: Apple

And I realized that in some important ways, he has a point.

Three years ago, when the iPhone was young, all eyes were on the iPod and the Mac.

Since then, the iPhone has become Apple’s primary growth engine and the focus of the lion’s share of investor attention.

When iPod sales underperformed with 9.05 million units sales in last quarter’s earnings report, it scarcely warranted a mention: the big news was that iPhone sales outperformed with 14.1 million units.

But here I’d like to make the case that investors should still care quite a bit about iPod sales.

Here are three reasons why :

THE HOOK:

The low-end iPod seems pretty simple in retrospect. It’s a media player that plugs consumers into Apple’s digital ecosystem through the iTunes Store. Low-end iPods (the ones cheaper than the iPod touch) don’t surf the web, or run apps, or any of that. They just play music and maybe video.

Here’s the key thing to consider, though: low-end iPods are the biggest reason why Apple now has more than 100 million credit cards on file – and it continues to be the Trojan Horse that hooks the youngest consumers into Apple’s ecosystem, with the iPod shuffle at the low stocking-stuffer price of $49.

THE LINE:

But Apple didn’t get its most recent $20.34 billion quarter by majoring in stocking stuffers. There’s got to be more to the iPod than $49 trinkets – and there is. Traditionally, the most popular version has been the mid-range nano at $149, which has a small color screen, video playback, and was the first full-fledged iPod to incorporate flash memory. That has changed, however – now the $229 iPod touch is challenging the nano’s popularity.

That makes the iPod a vitally important product in Apple’s strategic lineup. According to an AdMob surveyearlier this year, 78% of iPod touch users were under 25 years old, compared to just 25% of iPhone users. Why does this matter? One of Apple’s key strategic advantages is iOS, the operating system that runs across iPods, iPads and iPhones. If Apple wants to hook the younger crowd on its OS, moving them up to iPod touches is essential

THE SINKER:

So we’ve established that the iPod is valuable for hooking people on the iTunes ecosystem and pulling them up into Apple’s iOS, which makes them prime candidates for the high-profit iPhone once they reach the target demographic. But what else is the iPod good for? Financial leverage. Think about it: Apple is the world’s top single buyer of flash memory. How did that happen? iPod. That likely means Apple can secure flash at a lower cost than anyone, boosting margins. The new iPod touches also use the high-resolution Retina Display that Apple brought to the iPhone this summer, which should help Apple lower its cost enough to (perhaps) bring the technology to the iPad 2.

In other words, what the iPod does for Apple is similar to what the PC business does for Hewlett-Packard: It provides the scale in a lower-margin, slow-growth business that sinks costs. That brings better margins and competitive advantages in higher-margin, higher-growth businesses. Bonanza.

Questions? Comments? TechCheck@cnbc.comAnd you can follow Jon Fortt on Twitter @jonfortt

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