How long will the iPod be the core of Apple's business?

Apple's CEO Steve Jobs is a happy man at the moment. Five years ago his company lost $25 million. Last year it generated profit of $1.3 billion. This success is thanks mainly to its iPod music player.

If we were to keep on the musical theme and turn a phrase that best sums up this situation, perhaps the album by UK pop group Placebo would be most apt: "Without you I'm nothing".

At a conference two weeks ago promoting new products, which also included the company's latest iPods, Jobs jokingly showed an iPod toilet paper holder to demonstrate the widespread adoption of iPod accessories. And with 60 million sold, so he should.

Yet despite this runaway success, Jobs is trying to position Apple beyond the iPod. At the conference he spoke of the prevalence of Apple around "your" home.

"Apple's in your den now, right?" Jobs said. "iTunes on a Mac or a PC. Apple's in your livingroom with [the forthcoming in 2007] iTV driving your big flat-screen TV. Apple's in your car, with over 70 percent of the 2007 model cars offering iPod connectivity. And of course, Apple's in your pocket, with iPods."

Well that may be true, but while Apple is making some money on these products, will it be enough? Its traditional computer hardware line is a case in point.

In fiscal year 2003 the company generated $4491 billion in 'Total Macintosh' sales. This includes the iMac, eMac, Mac mini, Power Mac, iBook, PowerBook and Xserve product lines. Two years later that number rose to $6275 billion, which the company says was partly due to the positive Apple branding via the iPod.

Compare this to iPod-generated revenue. In 2003, iPods contributed $345 million to the company's total sales of $6,207 billion. For the last fiscal year, which generated total revenues of $13,931 billion, that total rocketed to $4,540 billion, a 1215 percent increase. It's iTunes and iPod accessories have also grown dramatically in that two-year period, rising from $36 million in 2003 to $899 million in 2005.

Unit sales of iPods for fiscal 2005 were 22.5 million, well up on the 4.4 million sold in 2004. With Apple selling more than 60 million units worldwide since the iPod was introduced in 2001, net sales will again be good for the company when financials are announced next month.

While Creative, SanDisk, Sony or Olympus have pushed Apple in the MP3 market, none has really captured significant market share. And with Microsoft Zune coming out in the US at Christmas, the next 12 to 18 months may be a bit trickier for Apple.

This competition from Microsoft could be the killer of iPod's meteoric rise. Unlike the iPod, the Zune music player will feature wireless technology and a built-in FM radio tuner. Additionally, the moneyed Microsoft is not afraid to spend big when entering new hardware markets, even if it initially loses money on it. The Xbox is a case in point.

Then again, while Microsoft may have poured millions into the Xbox, its main rival, Sony's PlayStation, has held its own. Just like Sony in gaming, Apple has done something right in music players and content delivery, so there is no reason why iPod and iTunes sales should not grow. Its annual report for fiscal year 2007 should reveal all.

Nevertheless, away from iPods, Apple's computer hardware business is struggling under the weight of competition.

The company's 2005 financial report says price competition in the market for personal computers has been particularly intense, with "competitors who sell personal computers based on other operating systems" aggressively cutting prices and lowering product margins to gain or maintain market share. It goes on to say: "The Company's [Apple] results of operations and financial condition can be adversely affected by these and other industry-wide downward pressures on gross margins."

Recent IDC figures for worldwide PC shipments for the second quarter of 2006 revealed a Top 5 list that was headed by Dell with 19 percent market share, then HP (15.9 percent), Lenovo (7.7 percent), Acer (5.4 percent) and Fujitsu/Siemens (3.4 percent). Apple was grouped with 'Others'.

With its Macs, Apple has stood out in the crowd because it has differentiated itself from the rest of the PC makers, running its own OS and providing a totally different user experience on a Mac than a PC. The move to the Intel platform and the release of Boot Camp, software which allows users of Intel Macs to install a bootable version of Windows, also raises an interesting point. If consumers can get Macs operating on Microsoft Vista, why would they spend money on a Macintosh, when they could turn to Dell or Acer for a cheaper, comparable PC?.

Of course, on the flip side, competing head on and playing directly with the same OS might be just what is needed to boost Macintosh sales -- a view shared by analyst firm Needham & Co in a recent report detailed in this article

So where will the company's Next Big Thing come from? Hotly rumoured is the 'iPhone'. But Apple is likely to encounter a different market in phones than it did with the iPod. The sleek design of the iPod revolutionized the young MP3 market. Can an iPhone do the same in a market that already has many incumbents such as Sony Ericsson, Nokia and Motorola, who along with proven track records, are building devices which already have functions similar to an iPod, and much more?

Apple's financials come out in mid-October. The news should be interesting for competitors and investors alike.