Apple near saturation point for iPod, iTunes use by teens

"We believe that the teen demographic is a critical component of long-term growth in the digital music and mobile markets, and Apple is taking its leading position in music and moving aggressively into the mobile market," analyst Gene Munster wrote in a summary of his firm's findings.

Now in its eighth year, the bi-annual Teen Survey sees representatives for Piper Jaffray visit several high schools around the country and poll students about their interest and buying patterns in portable media players, online music, and, more recently, the iPhone. This year, 600 students with an average age of 16.3 years old were surveyed, 54 percent of which were male and 46 percent female.

iPods

Overall, 92 percent of students said they currently own a digital media player, up from 87 percent a year ago. Of these students, a resounding 86 percent reported owning an Apple-branded iPod, an increase of 2 percent from the same survey conducted in the fall of last year. Just 4 percent of students admitted to owning a Microsoft Zune.

However, when asked about their interest in buying a new digital media player in the next 12 months, only 19 percent said they planned to do so, representing a "dramatic" decline from 28 percent a year ago, and suggesting the market is near saturated. For Apple, the good news is that 100% of those respondents who said they plan to make a new purchase in the next 12 months indicated that their new player would be an iPod.

"Apple is dominant in the market, and the lead appears to be growing as the market nears saturation," Munster said, adding that this will likely drive Apple to turn its attention to secondary iPods like the new shuffle and iPods with more features and higher prices like the iPod touch. "Apple's dominance in the PMP market remains largely unchecked, and it is clear to us that Apple has captured the 'cool factor' among high school students across America."

iTunes

Meanwhile, the percent of teens downloading music remains relatively high at 82 percent, a slight uptick from the 16th bi-annual Teen Survey conducted six months ago. Unfortunately for the record labels, more than half (60 percent) are still relying on illegal peer-to-peer file sharing networks to acquire their tunes. And despite the success of easy-to-use services like iTunes, this figure has fallen only 4 percent over the last two years.

That said, 97 percent of students who do purchase their music online through legal outlets say their digital shop of choice is the iTunes Store, up from 93 percent six months ago. Real Network's Rhapsody service was a most distant second, catering to just 2 percent of the students Piper Jarray surveyed. Napster was the only other service that registered in the poll, with a measly 1 percent of students confirming their use of the service, down from a high of 8 percent in the fall 2005 survey.

"As early as Fall-07, iTunes enjoyed market share of around 90 percent, which dipped to ~80 percent in the year following, due primarily to several new music services debuting with significant marketing pushes (Yahoo! Music, Rhapsody, eMusic, Amazon MP3, etc.)," Munster explained. "However, we believe, and our survey supports, that iTunes' share has since bounced back into the mid-90s as the appeal of these services has lost momentum."

iPhone

As far as iPhones and the teen demographic, Piper Jaffray's 16th bi-annual survey last fall found that 8 percent of teens owned an iPhone with an additional 22 percent saying they planned to buy one of the touch screen handsets over the next 6 months. In the most recent survey, the number of teen iPhone owners remained flat, though purchase intentions declined slightly to 16 percent.

"We believe AT&T rate plans are adversely causing the discrepancy in teen's interest in the phone, and actual market share gains; as much as teens want the phone, parents may be reluctant to add expensive monthly data plans to their teen's phone bill," Munster wrote. "We expect Apple to address this issue in the coming months, with a family of iPhone models including a high end model with current plan pricing and possibly a low-end model with fewer features and lower-cost monthly data plans."

The Piper Jaffray analyst, who maintains a Buy rating and $180 price target on shares of Apple, said this much-anticipated but unconfirmed model would be ideal for catering to more price sensitive geographies like China or price-sensitive demographics like teens.