As iPods fade out, Apple's iTunes turns up the volume

Apple's iPod business has shrunk to the point where the company no longer even mentions it among its main product list at quarterly earnings. And while unveiling this year's latest iPhones last month, Apple rolled out a new iPod color without little fanfare.

Some way to treat a product that sold26.4 million units in the past 12 months and helped pave the way to the company's current riches.

But as time goes by there's simply no arguing that the iPod has become a less important Apple product, especially because it generates less and less revenue for the company. On the flip side, Apple's iTunes business -- which includes the App Store, iBookstore, and sales of music, movies, and TV shows -- has evolved from the iPod's sidekick into the matriarch of Apple's offerings. It's become a major part of how Apple differentiates its gadgets from competitors.

For its fiscal year, which ran through September and was fully reported on Monday, Apple sold 26.4 million iPods, down 35 percent from last year. That amounted to $4.4 billion in sales, or down 30 percent in revenue from the year before. By comparison, the iTunes Store and its surrounding businesses (which grew out of the iPod) brought in $15 billion in sales and grew by 22 percent.

That's a far cry from the massive strides the store made in the early days, which were fueled by an ever popular and growing iPod line. But that growth has continued amid the iPod's dwindling popularity.

How iTunes stacks up iTunes and its related software and services have become a key to how Apple makes money. In the last year, the profitability of Apple's iTunes, software, and services business was second only to iPhone among all of the company's business units, even though it only represents 8.2 percent of the sales Apple generated in the just-ended fiscal year.

However, iTunes has bumped up against some ceilings. Music-related products and services have grown in overall size, but they've been shrinking to a smaller slice of Apple's revenue every year as the company's hardware business has exploded. Rewind to 2008 and it was iTunes' heyday as the world's go-to place to legally acquire digital entertainment. And the App Store had only just begun.

Today, the world has a surfeit of retailers willing to sell you digital music, movies, and shows. In many cases, Apple is delivering consumers to its competition. Mobile music listening is gravitating toward subscription services like Spotify or online radio services like Pandora. Apple, through its App Store, is what's bringing those services to device owners -- as it must. The revolutionary premise of the iPhone was that the apps turned the device into a digital Swiss Army knife. The iPod as a walled garden evolved into a more open device, despite Apple's desire to control every part of it.

Even when Apple jumps on the bandwagon with a service like iTunes Radio, there are signs that the competitor may not suffer as a result. Last week, Apple revealed that iTunes Radio hit 20 million users, streaming a billion songs in about five weeks. It's strong growth, but don't forget iTunes Radio was more than halfway toward that user milestone in only five days.

From that data, B. Riley analyst Sameet Sinha crunched that iTunes Radio users spend 75 percent less time listening to the service than listeners of Pandora. Even with Apple's reach and even though initial users of iTunes Radio are largely early adopters and Apple fans, Pandora is sticky. A Canaccord survey of 860 consumers revealed that almost all of them who had tried iTunes Radio -- 92 percent -- said they still use Pandora. Two-thirds said they use Pandora at least as much as or more than iTunes Radio.

One other metric to look at then is the App Store itself, which has fueled Apple's iTunes growth. Apple attributed as much in an earnings call with Wall Street analysts on Monday, saying that users have cumulatively downloaded 60 billion apps. Also, the company has paid out $13 billion to developers since the store launched in mid-2009. Apple doesn't go into as much detail on how its financials break down for that business unit. For instance, you won't get how much of that revenue was in music tracks, movies, TV shows, books, or apps.

For the iPod, though, its decline is simply a side effect of Apple's success in other areas. Nearly all of its key functions (short of a low price) could be found in the iPhone, beginning with the first version in 2007. This cannibalization has been touted by the company, particularly CEO Tim Cook, who refers to the products that replace these as a "huge opportunity."

The very same thing is happening right now with Apple's Mac sales, which have shrunk amid the growth of the iPad.

"Our core philosophy is to never fear cannibalization. If we don't do it, someone else will," Cook told analysts back in January. "We know that the iPhone has cannibalized some of our iPod business. That doesn't worry us. We know that iPad will cannibalize some Macs. But that's not a concern."

In other words, Apple values progress more than it treasures the iPod. It's been the same story with several other products, which faded into the sunset in the name of something newer and better -- from the original iPod Mini to plastic MacBooks. For the iPod, the iPhone fulfilled many of those same promises in 2007, making it an unlikely survivor, though one whose future now seems more uncertain than ever.