iTrade Pro Forma Sales Projections Annual Unit Sales 120,000,000 100,000,000 80,000,000 Ipods Sold Unit Sales 60,000,000 Unit Sales with iTrade 40,000,000 20,000,000 0 2002 2003 2004 2005 2006 2007 2008 2009 Fiscal Year Fiscal Year Unit Sales Unit Sales with iTrade 2002 381,000 381,000 2003 939,000 939,000 2004 4,416,000 4,416,000 2005 22,497,000 22,497,000 2006 41,043,000* 41,043,000* 2007 65,668,800* 72,571,904* 2008 78,802,560* 89,847,527* 2009 86,682,816* 99,936,776* *Projected Percent Growth 450% 400% 350% 300% Percent Grwoth 250% Percent Growth Percent Growth with iTrade 200% 150% 100% 50% 0% 2003 2004 2005 2006 2007 2008 2009 Fiscal Year Fiscal Year Percent Growth Percent Growth with iTrade 2002 2003 146% 146% 2004 370% 370% 2005 409% 409% 2006 82%* 82%* 2007 60%* 77%* 2008 20%* 24%* 2009 10%* 11%* *Projected The slowdown in growth of iPod units sold is due to the fact that as the product line expands, many people who already own the device will be unwilling or financially unable to purchase a new one. Because the flagship iPod is already in its fifth generation, most people who see the device as a necessity already own one, leaving a smaller opportunity for future growth. This phenomenon will continue to play a large part in the future sales outlook of the iPod. Additional Profit Generated by iTrade By essentially lowering the profit margins on new iPods that are obtained using the iTrade system, Apple can generate a large amount of incremental profit that they would not have achieved otherwise. $7,000,000,000 $6,000,000,000 $5,000,000,000 $4,000,000,000 Total Additional Profit Attributable to iTrade Profit Without iTrade $3,000,000,000 $2,000,000,000 $1,000,000,000 $0 2007 2008 2009 Fiscal Year Note: Profit figures are based on the estimate that high capacity iPods constitute 46.72% of total iPod sales figures during any given fiscal year. Total Additional Profit Attributable to iTrade $894,642,312 $900,000,000 $745,535,260 $800,000,000 $700,000,000 $600,000,000 $465,959,537 $500,000,000 $400,000,000 $300,000,000 $200,000,000 $100,000,000 $0 2007 2008 2009 Fiscal Year Additional Profit on Low Margin Fiscal Year Additional Units sold Units Additional Profit on High Margin Units 2007 6,903,104 $120,804,324 $345,155,213 2008 11,044,967 $193,286,919 $552,248,340 2009 13,253,960 $231,944,303 $662,698,009 Fiscal Year Total Additional Profit Attributable to iTrade 2007 $465,959,537 2008 $745,535,260 2009 $894,642,312 Due to the scarcity of data regarding unit sales component percentages per model, accurate predictions of revenue and cost of goods sold predictions cannot be made to the overall breadth of the iPod line. However, estimates can be made pertaining to unit sales growth and the additional profit attributable to the iTrade system, using the 46.72% estimate of high capacity iPod unit sales. Logistic Growth Model of the iPod Unit Sales Curve The logistic growth model is essentially an S-curve outlining the growth of a certain population over a period of time. By definition, growth in the earlier stages begins as exponential, and then as competition arises, the growth rate slows until halting at maturity. Due to the incredible proliferation of the iPod in culture and society, sales of the units have experienced tremendous growth over the past few years. However, recent sales figures foreshadow a diminishing growth rate in subsequent years. The second quarter of fiscal 2006 was the first in which the company experienced negative sales growth, indicating an overt trend that threatens to extenuate the profits of Apple’s most successful product division. Data and sales modeling suggests that the apex of such sales growth has been reached, and that the company will continue to see a slowdown in sales until they finally halt at maturity. This is characteristic of the logistic growth model. The slowdown in sales can be attributed to a variety of factors: Most consumers who feel that the iPod is a necessary product in their lives have already made the purchase and have no need for another model. Most consumers who purchase their iPods keep them for at least two generations, so those that already own them will be less likely to buy a new model. The flagship iPod is already in its fifth generation, and as an increasing number of competitors and technological advances come to market, the iPod starts to sink into a sea of relative obscurity. Because it is a cultural phenomenon, the fad appeal of the iPod is inevitably destined to diminish. Nothing short of a massive, aggressive marketing campaign or boldly innovative new features at a lower price can perpetuate the impressive historical growth rates of iPod sales. The population in the U.S. grows at a lethargic pace of 1-2 percent per year, hardly enough to sustain the iPod unit sales growth rates. Sooner rather than later, the iPod market will begin to atrophy and there will no longer be any new customers to cater to. Because the most recently released fifth generation iPod has a video screen, many consumers feel that the limit of desirability of the units has almost been reached. Apple can only put so many new features on a product in order to increase sales. Also, future innovative features such as iCal collaboration, Bluetooth compatibility, WiFi, and others appeal to a small niche market of wealthy, innovative users who actually possess all of the technological devices to participate in their “digital lifestyle.” While the iPod sales machine slowly loses momentum, it requires a selling strategy that will sustain adequate profit levels until the company develops a new product to continue the evolution of the portable digital media market. iTrade breathes new life into the product line while simultaneously introducing two distinct levels of consumer into the market. The program provides for an additional $2.1 billion of net profit over three years, which will be necessary for the growing needs of the company. Apple has always been seen as a highly innovative company, and it is one of a handful of its size that can continually bring entirely new products to the marketplace. The success of the iPod in the eyes of the public will weigh heavily on their future decisions to buy new products from Apple. Should the iPod take a turn for the worst and buckle to the pressure of the market share, the highly- dominant Windows user base will see yet another failure by a company that fails to conform to standards. The possibility of the iPod market share shrinking from the whopping 75% it is today to around 50% could prove disastrous for the company’s profit margin as well as customer base. Apple cannot afford to remain complacent in this area, and simply adding new features with each new generation release will not be enough to secure its dominance in the market. Already, companies such as Sony and Microsoft have explicitly declared war on the iPod, and Apple should not treat those threats with indifferent ears. IBM’s introduction into the PC market nearly wiped Apple out in its early years, and Apple looked down on them with condescension and arrogance. While Apple has a market capitalization of $57.72 billion, Sony and Microsoft carry caps of $47.36B and $236.16B, respectively. Both companies are highly competitive internationally, and pose a very serious threat to the iPod dynasty. Although Apple has a very significant head start in the music market, these other companies have the management talent and the financial resources to make a successful run at tearing down Apple’s dominant market share. As long as Apple continues to open itself up to new ideas and innovation, they will remain at the top of the portable media market for years to come.
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