Declining iPods – Can Apple Find Another Smash Hit?

As iPod growth begins to slow, what can Apple do for the next chapter in their innovation story? Is there anything in the pipeline?

As Apple Computer prepares to announce third-quarter earnings July 13, there's a growing sense even among the company's most avid fans that the iPod party is ending. Yes, some analysts are predicting a quarterly revenue number slightly higher than Wall Street's consensus of $3.3 billion, but few are predicting any new blowouts.

Still, the consensus among analysts is that iPod sales compared to the previous quarter will be flat, at roughly 5 million units. From a device that has boosted Apple's revenues 148% since 2001, signs of a plateau are clear.

Come January, 2006, Apple investors had best beware. With every passing quarter, the company that set the music world on fire with the iPod is in greater need of an encore, most analysts who cover the company believe.

Computers likely won't pick up the slack. Mac sales are expected to grow 26% in 2005, then slow to just a 6% pace in 2006, according to Goldman Sachs. And iPod's sales growth is expected to cool from a sizzling 234% in 2005 to just 18% in 2006.

I suspect tweaking the iPod will help goose sales a little. But will we see a Mac revolution as a result of the iPod's success? I don't think so. Apple has a lot of smart people working there, but has been a case study in how not to capitalize on innovation. The future will show if iPod was a reversal of that trend, or simply a fluke.