iPhone "cannibalizes" sales of traditional iPods

San Francisco (CA) – Apple has conceded that a decline in “traditional” iPod sales could be attributed to “cannibalization” by the wildly popular iPhone and iPod Touch. Indeed, the company sold 5.2 million iPhones during Q3, representing a staggering 626% growth over the year-ago quarter. Meanwhile, sales of the iPod Touch increased by an impressive 130%. However, the time of the iPod may be fading as the iPhone may have generated more revenue than the iPod family for the first time.

“We expect traditional MP3 sales to continue to decline over time as we cannibalize ourselves with sales of the iPod Touch and iPhone,” explained Apple CFO Peter Oppenheimer. “But we still have a great business which we believe last many, many years, and we will continue to manage well.”

According to Apple COO Tim Cook, the company recorded a “significant” increase in total phone sales due to launch of the 3GS and introduction of the $99 iPhone. Apple said that it sold 10.2 million iPods during the quarter, down about 7% year over year. iPhone unit sales were about 5.2 million.

“We don’t want to give you the precise mix, but we are currently constrained in every country we are shipping in. The demand for [the 3GS] has been very robust. It speaks to the great product that it is, and we are working really hard to fulfill that demand,” said Cook.

It should be noted that the cannibalization of “traditional” iPod’s could mark the beginning of the end for the “last-generation “devices. Indeed, Apple is likely to shift its focus to designing advanced versions of the iPhone and iPod Touch. Such an approach is certainly reasonable, as consumers may decide that an “all-in-one” iPhone is more cost effective than purchasing multiple mobile devices.

In fact, the most recent quarter may have been a historic quarter for Apple as far as iPod and iPhone revenues are concerned. In the directly preceding quarter, Apple sold 11.0 million iPods at an average price of $151 for a total of $1.665 billion. In the same time frame, the company sold 3.793 million iPhones for just over $1.5 billion, for an average revenue of close to $400. Even if the $99 iPhone negatively impacted the average revenue per sold unit, Apple should have seen more than $1.8 billion from iPhone sales during the quarter, while the higher price of the iPod touch is unlikely to have brought in enough money to give Apple revenues that were flat with the preceding quarter.

At this time, we are, of course speculating, but it is clear that the iPhone has gained enough traction to convince Apple to shift its focus. The company is far from abandoning the iconic music player, but we expect Apple to shift much of its innovation focus away from the iPod and towards the iPhone, which is now likely making more money than the iPod.

We will follow up on this article as soon as Apple’s official 10Q filing becomes available.