On Tuesday afternoon, Apple (NASDAQ:AAPL) announced an updated version of the iPod Touch. Its most affordable iOS device now has an A10 processor and up to 256GB of storage. Sales of iPods hardly move the needle on Apple stock these days — that’s why every other iPod model has long been discontinued — so why bother with a new iPod Touch?
And if the company is going to update the device, why such a minor bump instead of a modern design with features like a more recent processor and a larger display?
Both decisions are wrapped up in Apple’s strategy to keep driving revenue and profitability as iPhone growth slows.
Apple Announces New iPod Touch
On May 28, Apple announced the release of a new iPod Touch. Last updated in 2015, the 7th generation of the device gains an A10 processor (up from the previous generation’s A8) and a new 256GB storage option (up from a maximum of 128GB).
Otherwise, hardware remains exactly the same, including a 4-inch Retina display, an 8MP primary camera, HD FaceTime camera and a headphone jack.
Starting at $199, the price of the new iPod Touch climbs to $399 for users who choose the 256GB option.
Why a New iPod Touch Instead of Simply Discontinuing the Device?
Apple killed the iPod Nano and iPod Shuffle in 2017, leaving the iPod Touch as the sole remaining iPod. At that time it did get a storage boost, but in terms of what really counts — the processor and display — Apple hasn’t updated its entry level iOS device in four years. So why make a move now instead of simply closing the door on the iPod era altogether?
It’s all about the iPhone, the device that succeeded the iPod as the primary driver of AAPL profit and the reason why Apple stock is as valuable as it is today. With iPhone sales slowing, the company has been pushing services to pick up the revenue slack.
We’ve actually been expecting Apple to make this move. In fact, there was a possibility a new iPod Touch would make its debut at Apple’s March special event. At $199, the last remaining iPod is by far the cheapest Apple device that can be used for streaming Apple Music or watching the new Apple TV+ streaming video service.
In its press release, APPL notes that the new version offers “performance that is twice as fast as before.” With the upgrade to an A10 processor, the iPod Touch can take advantage of Apple Arcade — the company’s new paid gaming service that launches this fall. The new processor also ensures a few more years of iOS updates for the iPod Touch, helping Apple to avoid the fragmentation issue that plagues Android, and continues to make life complicated for Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google.
In short, with the cheapest new iPhone XR starting at $749 the new iPod Touch is an important gateway for ensuring as many customers as possible can pay for those Apple subscription services.
Why Just a Spec Refresh?
So why not bother updating any of the other components? A bigger, higher resolution display for example? And why go with the three year-old A10 processor instead of something more recent?
That comes down to Apple’s current approach to maximize profitability from its hardware.
Innovation has taken a bit of a back seat in favor of minor upgrades. This keeps hardware costs down, and maximizes profit margins. In the case of the iPod Touch, the rest of the hardware is deemed “good enough” as is the move to a processor from 2016.
Offering storage updates at $100 a pop means Apple can squeeze even more profit out of buyers — a strategy it also employs with iPhones. Skipping a modern redesign of the device also prevents the iPod Touch from cannibalizing iPad or iPhone sales. And the old form factor keeps the headphone jack — so the company can point critics to the new iPod Touch as a headphone-friendly music listening option.
The new iPod Touch may not sell like gangbusters, but the units Apple does move will be highly profitable for the company. Especially if buyers decide to pay extra for additional storage. And each iPod Touch sold is another potential subscriber to Apple Music, Apple TV+, Apple News+ and Apple Arcade. All good for AAPL revenue and profitability, and nothing but upside for Apple stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
