Can Apple Stop Defending Its iPod Cash Grab?

PORTLAND, Ore. (TheStreet) –- For some reason, Apple  (AAPL) is giving us a new iPod this year.

Our own Chris Ciaccia used analyst input to posit that the iPod still lives because parents need a way for children to fiddle around with the Internet before they reach cellphone age, recently acquired Beats Electronics needs a music-dominated device for its next step and Apple as a whole needs to keep people tied into its ecosystem as pressure from Amazon, Google and others mounts.

More likely, the folks in Cupertino wisely realize that getting some money out of a high-margin product is better than getting none. It's a cash grab and it's unnecessary.

According to Apple, the new 16-gigabyte iPod Touch will come in five different colors -- a throwback to when Apple products looked like a rainbow instead of an ivory checkerboard -- and include a front-facing camera to make it even more similar to the iPhone and iPad mini. That low-end model goes for $199 ($30 less than its last asking price), with a 32GB iPod Touch going for $249 (a $50 cut from the last generation) and 64GB model for $299 (another $50 price drop).

Great. There's yet another device that people won't listen to their iTunes playlists on or download iTunes music to. The number of music download purchases dropped for the first time in 2013, according to Nielsen, and has just continued to plummet in the first half of 2014 as playlists collect dust.

Apple attempted to snap out of it with help from iTunes Radio -- and its failing attempt to use streaming to sell music downloads -- but it discovered the streaming audience doesn't care about buying music. Only about 2% of iTunes Radio listeners ever hit the “buy” button to download a song. Even as a streaming service, iTunes Radio falls short. Its 8% market trails ClearChannel's iHeartRadio (9%), which is basically terrestrial radio streamed to other sources, and Pandora  (P) (31%).

Though Apple's purchase of Beats Music seemed to be more about headphone hardware than streaming, Apple picked up a streaming service as part of the deal. Beats is small -- with user numbers struggling to reach the 1 million mark even after a partnership with 110-million user service provider AT&T -- but it has the respect of music mainstays like Dr. Dre and Nine Inch Nails frontman Trent Reznor.

Ideally, Apple could turn that new steaming foray and the iPod into something workable. Interactive streaming like that offered by Spotify and Beats Music increased volume to 34.28 billion streams in the first quarter of the year from 25.44 billion streams during the same period in 2013. With music executives putting 1,500 streams at the equivalent of a full digital album, streaming equivalent albums have increased by 10.1 million units so far this year as download sales dropped by roughly 9 million units, according to Nielsen.

However, even dedicated streaming outlets like Pandora have struggled to make that music pay, shoving more ads into its free service and raising the cost of Pandora One for new subscribers from $3.99 a month last year to $4.99 a month earlier this year. That's $60 a year just for streaming alone. When Amazon raised the price of Prime for new members from $79 a year to $99 earlier this year, it ended up tacking the Prime Music streaming service onto its offerings just to get some sort of steady revenue from its music offerings. Google, meanwhile, just purchased streaming music service Songza at a time when -- unlike Apple and Amazon's (AMZN) Kindle Fire products -- it's making almost nothing off of Android hardware and just moderately more off of content.

All of that it a flimsy foundation for a stack of iPods that few people want. Sales of the iPod peaked at 55 million worldwide in 2008, just before the iPhone found its footing. Last year, that number dropped to 26.4 million. That's the fewest iPods Apple has sold since 2005, and those numbers are dropping rapidly. Last quarter, Apple shipped just 2.7 million iPods. That's down from 5.6 million units a year ago. Apple generates roughly $32.5 billion in revenue per quarter from the iPhone, $7.61 billion from the iPad and $5.52 billion from its Mac products. The iPod brings in less than $960 million in the same time.

The iPod, starting at $199, is $100 cheaper than the iPad mini and $200 less than the iPad with Retina Display.

Apple should realize by now that the hardware is only part of that ecosystem it wants to build, and Amazon and Google keep showing it how vulnerable that hardware side is. Amazon, Netflix, Pandora and other services have built themselves on the backs of iPads, iPhones and the users that come with them. By keeping the gates open, they've made Apple's hardware work for them and have created greater value by offering what iTunes can't or won't.

Amazon Prime customers have streaming music and downloads bundled with a bunch of other services including two-day shipping of Amazon marketplace products and Prime video streaming of movies and television shows -- including the HBO back catalog of The Sopranos, Six Feet Under, Boardwalk Empire and more. Verizon  (VZ) is using RedboxInstant to not only stream video through devices, but to cut in on the on-demand video market. AT&T  (T) is swallowing DirecTV  (DTV), Sprint (Spaired with Spotify, Cumulus partnered with Rdio not just to give the streaming service more content and give its family of radio stations a broader audience.

While Apple bulks up its hardware offerings, just about everyone else is bolstering the value of their services and eating Apple's lunch. The iPod is streaming just about everyone else's music instead of playing iTunes playlists and Genius mixes that users long ago gave up on. Unfortunately for Apple, consumers have a knack of finding a less expensive and similarly useful bit of hardware to do such things when Apple doesn't add value through iTunes or other services. As we discovered this week, Apple TV is now trailing Roku and Google Chromecast in the U.S. set-top box market it helped create.

Instead of just raking in the iPod cash while they can get it and sacrificing big chunks of that windfall to improve a dying device, Apple may want to consider investing that diminishing iPod profit into building a ecosystem of services rather than propping up an increasingly redundant family of devices.

When one of the primary defenses for the iPod's existence is that it teaches kids how to use an iPhone, maybe it's time to put it to better use or pull the plug.

-- Written by Jason Notte in Portland, Ore.

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Jason Notte is a reporter for TheStreet. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, the Boston Phoenix, the Metro newspaper and the Colorado Springs Independent. He previously served as the political and global affairs editor for Metro U.S., layout editor for Boston Now, assistant news editor for the Herald News of West Paterson, N.J., editor of Go Out! Magazine in Hoboken, N.J., and copy editor and lifestyle editor at the Jersey Journal in Jersey City, N.J.

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