Analysts question how long Apple can lead digital music market

“Apple has raced to the front of the digital music market with its iPod line. But some are wondering how long it can stay in the pole position,” Troy Wolverton reports for TheStreet.com. “How the competition ultimately turns out should have big implications for Apple’s stock over the long term. Its shares trebled last year as booming iPod sales — now more than one-third of the company’s revenue — revved up the company’s earnings — and its potential prospects. The stock’s run has left it trading at a sharp premium to rivals such as computer industry leader Dell.”

MacDailyNews Take: If iPod and the digital music market are so important to Apple, why does Wolverton compare Apple to digital music laggard Dell?

Wolverton writes. “Apple’s iPods held 82% of the market for hard drive-based digital music players last year, said Shyam Nagrani, an analyst at industry research firm iSupply. But the company likely will see its share slip in coming years, he said. ‘There’s no company in this world that can maintain 80% market share forever,’ Nagrani said.”

MacDailyNews Take: Then wouldn’t that be bad news for Microsoft and good news for Apple in the personal computer market, thereby boosting the other two-thirds of Apple’s revenue? Sorry for the logic interruption – back to the article.

Wolverton continues, “Indeed, the iPod already faces serious challengers and the competition is likely to heat up in the near future. Last week, for instance, Dell rolled out a line of new music players that cost significantly less than similarly equipped iPods.”

MacDailyNews Take: If the Dell DJ is serious competition, buy as much Apple stock as you can.

Wolverton plods on, “In addition, earlier this year, Microsoft showed its interest in the market at the CES trade show by touting a slew of new devices that use its Windows Media technology.”

MacDailyNews Take: Yeah, Gates’ stuff worked really, really well, too (click to watch Gates fail). While taping live, Gates tried to demonstrate his Media Center, but could not get it too operate.

Wolverton continues, “Songs purchased on Apple’s iTunes store generally work only on the iPod, which also won’t play Windows media tunes in their native format. Microsoft is trying to play up these problems through its ‘PlaysforSure’ logo, which touts the ability of consumers to play their Windows Media files on a variety of devices. And while Apple’s design — with its signature click wheel — has certainly played a role in the iPod’s popularity, much of the device’s success may have to do with the device being a fad, warn analysts.”

MacDailyNews Take: If more than 8 out of 10 people have iPods, “PlaysforSure” is meaningless except to advertise devices and services that are incompatible with the de facto online music delivery standard: AAC with FairPlay. This isn’t 1995, people are no longer enamored with products with Microsoft stickers on them. As for the “analysts” warning that iPod is a “fad,” Wolverton offers no names. The only person we’re aware of who claimed that the iPod as a “fad” was, surprise, surprise, Dell CEO Kevin Rollins.

Wolverton finally concludes with some opposite viewpoints, “‘The [iPod’s] click wheel is superior to anything the competition can offer,’ said Tim Bajarin, president and principle analyst at Creative Strategies, a consulting firm. ‘I haven’t seen anything from the competition that’s strong enough for the contenders to bite into [Apple’s] market share.’ ‘We’re in the early stages of a revolution,’ said Steve Wallman, a hedge fund manager whose fund is long Apple. ‘I think Apple is poised to do well in that next phase. I think the iPod is simply a foreshadowing of what’s to come.'”

Full article here.

19 Comments

  1. The answer is when some company can make a better Music store and player then Apple may have to worry about it.
    But so far nobody has so I guess Apple will be in the lead for a long time!
    And you could do this kind of analysis on anything and question everything. But the fact remains that if you have the best product then you will lead. There are only a few exceptions but I won’t go into that.

  2. “”It’s tough to think of a company that firmly entrenched in the computer and consumer electronic business sustaining a [valuation] that’s so high,” he said, adding that his fair value for Apple is about $19, an extreme minority view considering the plethora of Wall Street price targets at around $50. The company’s stock closed Wednesday at $44.12.”

    I really should have tried to get a job as an analyst after business school. You can say whatever you want without any consequence. (Just like weathermen).

    I really need to read his full analysis, as I’m curious to know how he comes up with a $19 valuation considering the fact that the company has about $10 per share of cash on the balance sheet. That means that he thinks that the total value of all the actual Apple “business” (future profits, brand equity, etc.) is worth less than what they have in the bank today (after 10 years of being the “beleagured” Apple that was going out of business).

    This is particularly interesting since this is the exact same spread in the price/book value that was built into the stock at it’s lowest point several years ago, before the revenue and profits skyrocketed. So, in effect, he is saying that Apple is no better off today than they were 3-4 years ago.

    What a complete moron.

    I can’t believe these people get a paychheck for this crap.

  3. …and in years past, the same analysts were predicting, in the near future, the total collapse of Apple itself…so take this with a grain of salt. A grain of salt the size of a Toyota Corolla.

  4. Critic:

    actually, he is saying they are only 2 times better off (remember to adjust for the split, divide the lowest price Apple was at by 2 = around 7.50, not 14 from the earlier 2001 doldrums)

  5. The company is on course to post sales of over $14 billion and profits of over $1 billion for this fiscal year.

    You can either use total cashflow as your starting point, in which case valuing Apple at 3 times cashflow would give you a value of $42 billion, or you could use P/E where a 36 times rating (not out of whack for a company with great brand recognitiion and a hell of a lot of intellectual property, plus a pile of cash in the back) would give you a price of around $40 billion.

    Saying that AAPL is only worth $15 billion is unbelievably defective given that, if fully liquidated, Apple has equity of some $5.8 billion. This means that the improbably named Troy Wolverton believes that Apple is actually worth less than one years cashflow. Truly cretinous.

  6. Streetwaffle.com is just trying to get some negative share price movement going and then go in in advance of Apples Q1 announcements which will see the next wave of buying because Q1 will again be stupendous…

  7. Unless an iTunes/iPod competitor developes something that is clearly superior (in the minds of consumers), Apple will maintain its lead.

    It never fails to amaze me how clueless all of the iTunes/iPod competitors are. With legal music downloads being a single digit percentage (7-8%) of total music sales and iTunes having a double digit percentage (approx 75%) of music download sales, these nimrods keep trying to take sales from Apple, instead of expanding the market – where there is much greater growth potential.

    The real threat to Apple isn’t going to come from the iTunes/iPods wannabes. It’s going to come from one of the major music labels when they get a clue that DRM is not the future of music downloads.

    When one of them realizes that music is now a commodity. When they open their own online music store, featuring their entire music library in a universal file format without DRM, and with downloads priced around 25¢ to 50¢ per song; that will be the beginning of the end of the iTunes music store. And it will definitely be the end when other labels jump on the bandwagon. I figure it will put a big dent in PTP music filesharing piracy as well.

    Of course, this is the music industry I’m talking about. Like the the movie industry, they don’t seem to understand the moral of the story of the goose that laid golden eggs.

  8. From Critic:

    >I really should have tried to get a job as an analyst >after business school. You can say whatever you want >without any consequence. (Just like weathermen).

    I am a weatherman, trust me, we do far better than any analyst that has ever commented on Apple!
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  9. Nice clip MDN. I downloaded it. (You can do that really easy for almost anything by the way by opening the activity window, finding the movie URL and double clicking on it while holding down option). I had watched the entire fiasco before and it was even more of a cluster-wuck that this implied. The infamous BSOD even made an appearance. Kinda epitomizes the entire windows experience, don’t you think?

    I think AAPL is gonna continue to climb, we are just now glimpsing the outlines of the long term plan that has pieces quietly moving into place. Steve is playing this one like a master chessman.

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