Gene Munster of Piper Jaffray
December 15, 2006
Based on several catalysts, we believe Mac market share can grow by 1% again in 2007, ending the year at around 4%, with an average for the year of 3.5%."
December 5, 2006
With one month left in what is anticipated to be a solid holiday quarter for Apple, we believe investors will start to shift their focus to potential new product announcements at Apple's Macworld expo on January 9.
Just as Apple waited several years to enter the MP3 market, we believe the company is well-positioned to enter the phone market now that early music-enabled handsets have tested the waters. Apple will differentiate itself by offering iTunes integration on Macs and PCs, and by leveraging its expertise in software engineering for media playing devices."
November 22, 2006
While Apple has maintained a robust inventory [of iPod shuffles], our checks with 40 big-box retailers and online vendors show that demand is outweighing supply in these channels.
That said, our checks with 20 Apple retail stores show that 100% have over 50 shuffles available heading into the busiest shopping week of the year. In other words, once again, Apple seems to be keeping the inventory of its hot new items within its direct channel until it can ramp up enough supply to cover both direct and indirect.
When asked to suggest an MP3 player for less than $200, 70% suggested an iPod model. This figure is up from 52% in June 2005 and 38% in November 2005.
Since the shuffle was not released until November 3, the player will likely have a material impact on the November and December NPD data and our current expectations could prove to be low."
November 16, 2006
The 14 million to 15 million unit range is based on various assumptions and is an extrapolation of one month of data, so we believe investors should supplement this data point with other information.
It is likely that the impact of the iPod shuffle, which shipped on November 3, will have a material impact on the November and December NPD data and our current expectations for the quarter could prove to be low."
November 13, 2006
If, at some point, there are millions of Zunes in the market, the wireless sharing capability may prove to be a more compelling feature. We do not expect to see a material impact on iPod market share from the Zune over the next two quarters, unless Microsoft starts a massive marketing effort within the next few weeks.
Media and analyst coverage of Zune has been high, but we believe public awareness of Zune is still low at this point and would need to grow significantly in the coming weeks for Zune to have an impact on this holiday season.
Ultimately, it is possible that Microsoft will be better off for spending several years investing in this initiative, but unless Microsoft makes some inroads against Apple during the investment phase, it may prove to be too late to capture meaningful market share.
We expect community features will become increasingly embedded in various services (and devices via wi-fi), including iTunes, but ultimately we believe that this is a device driven market and for Zune to be successful Microsoft must develop devices that capture customers from Apple."
November 7, 2006
The bottom line is that there is significant pent-up demand for Intel-based Macs among the Adobe creative pro community. Adobe creative pro customers cannot run their Adobe apps at full effiency on an Intel-based Mac until CS3 is released, so many are waiting until that time to upgrade their machines.
If we assume that our forward estimates are also based on 150k Macs per quarter that are sold to Adobe's creative pro customer base, we would come to a figure of 600k Macs sold to Adobe creative pros by the time CS3 ships in April of 2007. This leaves us with 2.4 million Adobe creative pro customers that are yet to move to a new Mac. If 24% of these customers upgrade to a new Mac within the first two quarters following CS3 release (June 07 and September 07 quarters), we can expect 288k Macs sold to Adobe creative pros in each of those two quarters."
November 2, 2006
How do new product initiatives like iTV play into Apple's future?
Apple's new wireless media hub, codenamed iTV, will be released in the March 06 quarter. While this product does not fit neatly into either the Mac or the iPod+iTunes sales segment, we believe this third category, the digital living room, bridges Apple's two main growth engines. The iTV lets users access iTunes content stored on a computer and view it on a television. Whereas the iPod gives portable access to the same content, the iTV brings the content into the digital living room. Therefore, the iTV provides further integration between the Mac and iPod sales segments, by adding a 3rd significant growth driver to the mix. With the addition of an iPhone in the next 6 months, Apple will add a 4th driver, as the company continues to add to the ways in which media content stored on a computer is accessible anywhere at any time."
What is Apple's strategy for the holiday shopping season?
We believe that Apple sells more of its lower ASP iPods during the holidays relative to the rest of the year. With the significant updates to both the Shuffle and the nano in September, it seems Apple is focusing on the flash-based iPods for the December 06 quarter. The simple fact is that shopping data suggests that gift-givers buy lower-ASP products for others than they do when buying products for themselves. We believe Apple recognizes this trend and is situating the iPod line accordingly for the holiday shopping season."
What is the status of the options backdating investigation?
On October 4, 2006 Apple released the findings of the internal option grants investigation and found no misconduct by any current board members, including Steve Jobs. We believe Jobs will remain Apple's CEO, given he was aware of these favorable grant dates but was not aware of the accounting treatment and did not benefit from them. Apple has indicated that the investigation was conducted by three board members using independent counsel. On October 27 Apple announced that NASDAQ had granted its request for continued listing on the exchange, pending the timely submission of its delayed June 06 report."
Has the relationship with Intel been a good one?
Apple indicates that the company's relationship with Intel has been good for both sides. We believe the two companies are realizing synergies each did not anticipate and Apple is surprised with the level of innovation that Intel has exhibited. Moreover, with over 60% of all Macs sold in the September 06 quarter being portables, the ratio of performance to power consumption is important, and Intel chips address this issue."
What are the highest priorities in designing a Mac?
In the September 06 quarter, over 60% of all Macs sold were portables, and even the most popular desktop models have space constraints (the iMac and the Mac mini). Therefore, high performance and low power consumption are top priorities. Apple has a competitive advantage in the portable space, because they design every aspect of the computer (not just hardware) and can maximize each element to run smoothly together."
Have Mac sales increased in the enterprise sector?
Preliminary IDC data on worldwide PC shipments shows that Mac market share has grown from 2.5% in the June 06 quarter to 2.8% in September 06. While Apple indicates that the company is pleased with its growth in the PC market overall, we believe Apple is making slow gains in the Enterprise space. Apple does not provide forward-looking product roadmaps, which are important to Enterprise IT buyers and the company will not change its stance on this issue. In sum, Apple will continue its focus on the consumer, education, and creative professionals markets as they pursue market share gains."
Is the upcoming Vista launch a threat or an opportunity?
Regarding the pending release of Windows Vista in early 2007, Apple's plan is to try to seize the opportunity to gain switchers as Windows users consider to upgrade to Vista. While Windows users contemplate upgrading software and/or hardware to run Vista, we believe Apple will continue market share gains via switchers. In the September 06 quarter, Apple retail stores sold 50% of all computers to people that are new to the Mac (inline with the previous two years) and we expect this number to increase during the Vista upgrade period. During that time, Apple will release its next generation of OSX Leopard, to compete with Vista, and we anticipate a new marketing strategy to draw attention away from Vista's release."
Will Vista run on Boot Camp?
We believe that Apple's Boot Camp, which will be a central feature of OSX Leopard, will make it possible to install Windows Vista on a Mac. Boot Camp currently enables the installation of Windows XP on a Mac, and while there will be challenges with Vista, Apple developers successfully dealt with similar challenges in building Boot Camp for XP. Separately, we do not believe Boot Camp will offer a parallel Windows/Mac desktop."
How favorable is the component market right now?
With the release of the MacBook Pro featuring Intel Core 2 Duo processors, Apple also significantly reduced the price of adding RAM to Macs. The new pricing scheme is more competitive with aftermarket RAM providers and is indicative of the favorable component market for RAM."
How will the addition of iTV change retail stores?
Apple plans to leverage the retail stores as launch pads for new products. With the addition of iTV in the March 07 quarter, Apple is readying its stores to launch, market, demo and sell the product. While the retail stores will use a few LCD TVs to demonstrate the features of the iTV, we believe that Apple will not sell 3rd party televisions, nor will the company develop Apple-branded TVs to sell in the retail stores. Overall, the iTV will not require a drastic reorganization of the retail stores, but they will serve as launch pads for Apple's new products in early 2007. Currently about 60% of the square footage at stores represents Macs and 40% iPods. The iTV will draw slightly from each, but over the long haul we believe Apple will continue the focus on Macs at the stores."
As the retail initiative enters its fifth year, is it healthy?
Apple has indicated that the retail initiative is profitable as they continue their plans to add 40 stores per year. Currently Apple has 165 stores. Overall the retail stores contribute nearly 20% of Apple's overall revenue and the Online store adds another 20%. And for Apple, these direct channels are higher-margin channels than the indirect channels. The company indicates that store traffic is high (with 10,614 visitors per store in the September 06 quarter), so the focus is on improving conversion. Currently, the average bill of each visitor (not each customer) was $60 in the same quarter."
Will Best Buy and Circuit City sell Macs?
Apple currently has 40,000 indirect iPod distribution points, and 7,000 indirect Mac distribution points. Currently Best Buy (824 US stores by the end of November 2006) and Circuit City (624 US stores by the end of November 2006) do not sell Macs in-store, but are in pilot projects. Best Buy is in a pilot with 50 stores to sell Macs, with Circuit City in pilot at what we estimate to be less than 10 stores. Both Best Buy and Circuit City have stated they are "excited" about working with Apple to sell Macs. We believe by the end of 2007, a third of US based Best Buy and Circuit City stores will sell Macs. Mathematically, this would add 7% to the overall reach of the Mac retail (assuming 33% of Best Buy and Circuit city stores will sell Macs). Conceptually, this will increase the retail reach of the Mac by more than 7% given Best Buy and Circuit City's store traffic is greater than the average Apple indirect retail outlet."
What is the key to store profitability?
Apple's retail stores are unique because they utilize a model of face-to-face service for technology consumers. The company leverages this and monetizes it through the ProCare program, which is essentially a membership to the Apple store and all the resources that are available at the store. This includes "personal training" sessions, "fast track" access to the genius bar, and other computer or iPod help. The membership costs $99 per year and the company has indicated it has just under 180,000 members (totaling about $18m in revenue). While the company does not disclose attach rates, we estimate about 25% of people who buy a Mac in an Apple retail store will buy ProCare. If you assume that Apple will sell 200,000 Macs in retail stores in 2007, that is 50,000 members at $99 a year, or $4.9 million in 80% plus margin revenue from store memberships. We believe this strategy helps the retail initiative to increase profits, add Apple Sales Consultants to help with ProCare and other support services, and ultimately sell more Apple products."
How are newer stores different than older stores?
At any given Apple store customers can receive face-to-face tech support at a Genius Bar, and some newer stores feature a creative help center called The Studio. Whereas older stores have about 8 feet of "bar" for customer support, newer stores (like the 5th Ave, NYC store) feature upwards of 45 feet of "bar." This prioritization of face-to-face support indicates that Apple has seen success with the Genius Bar strategy for offering a unique avenue for support."
Did the Intel transition impact Apple retail stores?
Apple announced that the Mac line would switch to Intel chips in June 2005 and completed the transition by August 2006. During that time, the retail stores saw the traffic/store slow, but that same figure increased during the September 06 quarter. While Apple does not disclose historical store traffic metrics, the company indicates that it hosted 10,614 visitors per store in the September 06 quarter."
Have the Genius Bar wait times decreased?
Throughout 2005 and 2006 Apple stores struggled with long wait times at the Genius Bars and the cash wrap (lines at the register), resulting in customer dissatisfaction. Apple indicates that the average time spent in the store for support has decreased from around 30 minutes to under 20, and less than 10 minutes for an iPod-related support issue. At the cash wrap, the stores now feature an EasyPay method with significantly reduces time spent at the registers."
What is the ideal location for an Apple store?
Our analysis of Apple's newest retail stores shows that the company targets high-traffic areas where people live, work and play. The plan for a new 21,350 square foot store at 815 Boylston Street in Boston, MA achieves these three priorities with nearby residence complexes, office buildings, and tourism destinations near the store. The company states it will open a store only if it will be profitable in its first year."
Has the Apple store on 5th Ave in NYC been a success?
Apple's flagship store on 5th Ave in New York City is the company's most productive store. The location is open 24 hours a day, and even between the hours of midnight and 6am the store offers all of its face-to-face support (Genius Bar, and creative support in The Studio)."
October 24, 2006
Since the iPod was introduced in Oct. 2001 it has been the primary driver of the company's growth engine. We are modeling for the year-over-year growth to stabilize at 20%, but believe 30% growth is achievable and will provide upside to our estimates.
Although we consider it an overestimation, if we use the mobile phone market as a proxy for the iPod's addressable market, then the iPod's market penetration is about 27.5%.
The mobile phone market represents a large potential supplement to iPod sales. Music-enabled phones are gaining popularity, but Apple will be the first to offer a unified solution with the design and usability of the iPod.
Both the iPhone and the iTV represent initiatives that could add iPod-like growth to the Apple story."
October 10, 2006
A couple of the studios indicated that they expect to have content on iTunes within six months, but it may require some tweaks to Apple's pricing guidelines to get them there. We would not expect additional studios to sign on with iTunes before the holidays, however, as most studios recognize that this change could disrupt their holiday business at retailers. For most studios, they are happy to see Disney serve as a 'guinea pig,' and we expect that if Disney's content continues to appear to be relatively safe from casual pirates, other studios will become more comfortable with offering content on iTunes.
It is possible that retailers will shift focus to other products if DVDs become less profitable due to lower priced online competition. Some of the studios refer to this as 'retaliation' and they are concerned that this could significantly disrupt current business models in the DVD market."
October 4, 2006
Of the students surveyed in the fall 2006 teen survey, we found that 72% own an MP3 player and 79% specifically own an iPod."
76% indicated they would buy an iPod within the next 12 months:
While Apple may have lost some ground in this category, 76% is still significantly higher than the next highest at 8% (Sony)."
72% of students continue to use free (P2P) music sharing networks instead of paying for music legally:
But of those students who use legal online music services, 91% said they use iTunes, which is up significantly from our spring 2006 survey, in which 71% of legal music downloaders said they use iTunes. We believe this is a result of the increasing variety of content on iTunes."
Teens interested in a music-enabled phone increased to 74% from 70% in the spring survey:
Importantly, teens are becoming more willing to pay more for this type of device with 43% of students said they would pay more than $200, up from 37%.
Apple continues to dominate the digital music player and online music markets, despite new competitors constantly entering the market. We believe that winning over the teen demographic is critical to continued long-term growth and Apple is clearly in the lead in this market segment.
September 22, 2006
While there are more music enabled phones in the market than we had expected to see, we believe the hype related to this market has yet to begin. Several products, such as the LG Chocolate and Motorola SLVR, have created a buzz in the market, but most of the rest of the offerings have not been met with significant fanfare.
We believe the iPhone will need to be priced around $300 to gain significant traction. As a benchmark, we estimate that the average price of all hard disk drive iPods sold to date is $324.
Price is clearly a consideration, however, and many customers indicated that they feel that an iPhone has the same value as Apple's high capacity iPods. Specifically, the 74% who would be highly likely to purchase an iPhone said that, on average, they would pay $285 for such a product. This is consistent with our thinking that Apple must price an iPhone in the $300 range to gain significant traction with the product.
Of the 50 European Apple customers we spoke with, only 44% have upgraded to an Intel Mac. Of the 56% that have not made the transition, half expect to upgrade in the next 6 months."
Many Apple customers are waiting for an Intel-optimized version of Adobe's Creative Suite before upgrading to Intel Macs:
We had expected that a higher%age of these loyal customers would have already made the move to an Intel Mac and we see this as a sign that Apple has so far just scraped the surface of the Mac transition opportunity.
Given Apple's most loyal customers in Europe, on average, bought their first iPod within the last 2.5 years, the average European Apple customer likely bought their first iPod within the last 1-2 years. In other words, we believe iPod/iTunes is still in early growth stage in Europe, similar to the U.S. iPod market 4-6 quarters ago."
September 19, 2006
Of the 60% of post pros who use Apple's Final Cut, only 11% indicated that they had switched from Avid to Apple. "Most (89%) Final Cut users started on the product or switched from a non-Avid product to Final Cut.
At last year's IBC tradeshow, post pros indicated that 22% of their work was in HD. This is similar to what we heard from U.S. based post pros when we spoke with 20 at the NAB tradeshow in April. Specifically, at NAB, post pros said that 25% to 35% of their work was being done in HD."
September 13, 2006
Regarding the new iTunes movie store and iTV streaming media hub:
This service and product are the first in what will be a multiple year strategy by Apple to target the living room as a new leg to the growth story. We consider the living room as one of the key, untapped consumer electronics markets.
While the impact to numbers won't start until the March quarter of 2007, we consider the move into the living room as significant given it represents Apple's third major addressable market. In the 1980-90s Apple was a personal computing company, it added portal music in 2001, and now the living room in 2006."
September 11, 2006
Munster believes Apple will ship an "iPhone" within the next 4 to 6 months:
That said, we have not seen any concrete evidence that the product is near completion or launch.
Also, given music enabled handsets are being introduced by potential handset maker competitors (ex: LG Chocolate), Apple will likely need to get in the game fairly soon to avoid missing the early adopters.
We believe the most likely iPhone buyers would be those who have previously owned a higher average selling price hard disk drive iPod. We estimate that by the end of the December 2006 quarter, Apple will have shipped 34.5 million hard disk drive iPods at an average price of $323.
Assuming 1.2 iPods per owner and assuming 33% of these higher average selling price iPod buyers buy an iPhone in 2007, we estimate approximately 10 million iPhones could be sold.
We are using a 10% operating margin in our sensitivity, which is more in line with the top margin of Palm. We believe Palm provides a better margin benchmark than Nokia and/or Motorola, given Palm is focused on high end devices and the devices are made with an ODM partner, which we would expect to be the case for the iPhone."
August 28, 2006
Despite Mac OS X's lower ASP, Windows users pay less per year (by $16) for full versions and significantly less per year for upgrade copies (by $59), in order to have the latest OS for their computer. Apple users therefore pay a premium on an annual basis for more frequent upgrades to Mac OS X, resulting in higher profitability per user for Apple.
Given Apple's ability to drive greater revenue per customer versus its competitors through sales of peripherals and frequent OS updates, Mac market share gains will mean more to the company than simply increasing Mac revenue. Most analyses of the impact of Mac market share gains exclude the positive potential impact on the company's peripherals and software segments, which account for 12% of revenue."
August 24, 2006
Apple settles its legal disputes with Creative Technology and agrees to pay $100 million in cash:
If Creative had been able to win any favorable rulings in the five outstanding lawsuits, Apple could have faced headaches including: further appeals, product injunctions, future and historical royalty payments, etc. Considering $100 million represents 1.1% of Apple's $9.2 billion in cash, we believe the settlement will prove to be the right course of action.
Over the last several years, Creative has been focused on head-to-head competition with the iPod and it appears that the company is now embracing the iPod eco-system as a way to grow revenue. We see this as a subtle admission by Creative that iPod does in fact dominate the MP3 player market and more may be gained from 'coopetition' than direct competition.
We believe many investors generally feel that Apple shares have a high relative valuation and, therefore, the Street remains split between those that believe shares deserve to continue to trade at a premium and those that believe shares should trade lower due to declining momentum. Our take is that Apple shares do not trade at a premium valuation.
Apple is a unique company in that its business stretches into both hardware and software. As such, we believe a comparative valuation group should consist of Apple's competitors in both hardware and software."
Comparing the PEG (Price-to-Earnings ratio divided by its year-over-year earnings Growth rate) of Apple against that of Dell, IBM, HP, Adobe, Autodesk and Microsoft:
With all of the relevant pieces in place, we see that the PEG excluding cash on Apple shares is 1.0, while the comp group average is 1.5. Clearly the right valuation metrics to use on any given company are up for interpretation, but we believe this method provides the most consistent strategy for comparison."
August 14, 2006
While there are some concerns from industry analysts that the Intel transition will negatively impact Mac application development, we believe our conversations point to the opposite conclusion.
After a week of testing the Leopard preview, we are impressed with the next generation operating system.
As Boot Camp moves from beta to an official version in Leopard and the Windows installation becomes more user-friendly, increasing numbers of Windows users will switch to a Mac.
These releases are not necessarily a race to the finish, but we believe that Apple will work hard to ship Leopard before or close to the release of Vista."
August 10, 2006
The company has said it is possible that a music-enabled phone could cannibalize the demand for a lower priced iPods. While we continue to believe there is a high chance that Apple will launch an iPhone in the next 12 months, the company says that the right path for Apple is to continue to pursue devices with one primary feature and not focus on multiple functions in one device."
July 6, 2006
Apple has stated that ease of use is a key element of the iPod, so wireless functionality is an obvious next step for the product line. Apple has also stated that the pace of iPod innovation will not change. Apple has yet to release a new iPod this year. Based on these two factors, we expect a new wireless iPod this fall."
No
wireless connectivity in iPods available.
One significant indication is that Windows Media-enabled MP3 players have been in the market for three years and have been unable to grow their roughly 25% market share. Additionally, we expect Apple will release a new iPod this fall that will likely focus on ease of use, including wireless connectivity."
June 19, 2006
Regarding feature film downloads on iTunes by end of the year:
Ultimately, we expect that iTunes will offer feature length movies on iTunes, but we do not believe this is a top priority for the company at this time."
At
WWDC in August Apple announces feature film downloads on the iTunes Store.
Apple has focused on TV shows because unlike full length movies, there is a clear value proposition to the consumer and the networks in offering TV shows. For a consumer, if you miss an episode (or entire season) of a show, iTunes is the only way to see it unless you want to wait until the episode comes out on DVD. The benefit to the networks is that this is a new way to monetize original TV content."
June 13, 2006
Several Apple specialist resellers indicated that they had been telling their customers not to buy iBooks over the last few months prior to the MacBook launch. These specialist stores are now seeing the result of this advice come back to them as pent-up demand.
Our checks reinforce our initial thesis on the June quarter, which assumes that lower-than-expected iPods will be offset by strong Mac sales that result from full availability of the MacBook Pro and the launch of the MacBook."
May 22, 2006
Our analysis of iPod unit data from NPD for the month of April leads us to a preliminary iPod number of 8.0 million for the June quarter. The 8.0 million unit number is based on various assumptions and is an extrapolation of one month of data, so we believe investors should supplement this datapoint with other information.
Recent chatter in various articles and web postings about trends with component suppliers have suggested that iPod units were slower than expected in April, so we do not think investors will be surprised by this early datapoint. As a result of 'Grads and Dads' buying we believe May and June iPod sales will likely be better than what was seen in April.
Since Adobe provided its second quarter intra-quarter update on May 2nd indicating that it expects results toward the lower end of guidance based on 'spring break,' investors have been trying to get their arms around causes of weakness in the quarter. Based on an analysis of NPD data, we believe the beginning of a slow down in the Creative Suite prior to CS3 are likely the cause of the company pointing to the low end of guidance for Q2."
May 16, 2006
We believe both consumers and investors tend to believe that purchasing a Mac will cost 20% to 30% more than a PC.
While many Mac buyers will go out and buy Windows Home Editionfor $199 in order to run Windows on their Mac, those who have recently purchased a PC, or will be buying a PC in the near term, should be able to take advantage of the fact that PC manufacturers, such as Dell and HP, will provide customers with Windows re-install discs for free or for a $10 fee. We believe this will make the move to a Boot Camp-enabled Mac more feasible for many potential buyers.
Indirectly, we expect the iPod to continue to be a foundation for growth in other parts of Apple's business, and we expect that by the end of 2006 more than 85m iPods will have shipped, providing Apple with a greater scope of awareness for various products."
May 4, 2006
Will Apple offer a built-in FM tuner in the iPod?
While innovation on the iPod will no doubt continue, we do not expect Apple will integrate an FM tuner, at least in the near term. We believe the company does not feel there is a strong desire from customers to have an integrated FM tuner; Apple has said that it thinks customers want to be their own DJs. Also, Apple only has an interest in adding features to an iPod that are very high quality; the quality of reception on FM tuners in existing MP3 players has been weak."
Why did we see a seasonal downtick in iPods in the March quarter for the first time in three years?
While this is the first sequential downtick we have seen for the iPod in some time, it is important to keep in mind that in prior March quarters major iPod launches occurred resulting in abnormal sequential March quarter growth. There would have been downward seasonality in the previous two March quarters, but in the March 04 quarter the iPod mini was introduced and in the March 05 quarter we saw the launch of the iPod shuffle. Backing out those two March quarter product launches, we would see that there always has been March quarter iPod seasonality; it was just less evident in prior years because of the new product releases."
How Is Apple attacking the international iPod opportunity?
2006 will be a year in which Apple puts more focus on European markets. In February 2005 the company estimated that iPod market share in Germany was 5%; today it's 21%. Market share in France is currently 11%. We believe Apple will look to grow iPod market share in Europe through marketing, not by competing on price."
How many iPods does each iPod owner have?
We had originally thought that the number of iPods per iPod-owner was 1.5 or greater. After looking at the growth of iPods in the last two quarters, we now believe that the number of iPods per iPod-owner is between 1.0 and 1.5. Assuming 80% of iPods have been sold in the US, and assuming 1.2 iPods per iPod owner, equates to 29.3 million iPod users in the US; about 10% of the US population has an iPod. We consider 10% a low penetration of iPods."
Is Apple Going To Make An iPhone?
We continue to believe there is a 75% chance that Apple will launch an iPhone (iPod/cell phone) within the next 12 months. In conversations with Apple, however, we have found that the company continues to say the primary focus will be on a standalone music device. The company has said it is possible that a music enabled phone could cannibalize the demand for a lower priced iPods. For example, the inclusion of a digital camera in cell phones did not impact demand for higher end cameras, but low priced cameras came under attack. Essentially, the low end of the camera market was taken away. The company has indicated that it does not want to see the low end of the iPod market get cannibalized by music enabled phones. While we continue to believe there is a high chance that Apple will launch an iPhone in the next 12 months, the company says that the right path for Apple is to continue to pursue devices with one primary feature and not focus on multiple functions in one device."
How can Apple keep the iPod competitive?
We believe the economies of scale with Apple's iPod provide the company with a significant competitive advantage, as competitors are unable to significantly undercut iPod pricing. Conversations with Apple show that it believes the key to staying competitive is to create the best experience possible, continually innovating in the product pipeline, and trying not to invent new product categories where no problem exists, but inventing new products to solve an existing problem. Apple management focuses on the problems consumers are facing and tries to focus product development on ways to solve those problems within the constraints of the supply chain. In addition to innovating and bringing new products to market, the existing iPod eco-system keeps the product competitive. There are more than 2,000 iPod accessories in the market: iPods work in users' homes, cars, or anywhere they take it. iPod owners have invested in community and, in general, it appears people feel the iPod eco-system and quality outweigh potential limitations of being tied to a proprietary file format."
Why can't Sony figure out the MP3 player market and compete with the iPod?
We believe Sony has done a poor job of marketing its MP3 players, starting with naming the products (for example: should I buy the "NW-E505" or the "NW-E307"?). In general, from Apple's perspective, the company believes that Sony has not gotten a strong grasp of the recipe required to create a strong customer experience with both hardware and software. Sony's historical strength has been in its hardware; most of the company's engineers are hardware focused. Sony, therefore, has been unable to create a customer experience similar to what exists with the iPod/iTunes integration."
Will the iPod shuffle stay in the lineup and when will it be updated?
The inclusion of the shuffle in iPod family was originally about protecting the low end of the market. At the time the shuffle was released, Apple did not have anything below $249 and competitors' products (Creative, iriver, Sony, etc.) were seeing some success in the low end. The iPod shuffle took the low end of the market away from competitors and, most notably, negatively impacted Creative's market share. While there has been some speculation that Apple will either discontinue or add new features to the shuffle, we believe the company wants to continue to provide a very low end player with few features. Adding features could impact the iPod nano market and removing the product from the lineup would be giving away the very low end market to other players."
Is iTunes headed for a tiered pricing model?
Apple's recent renegotiations with four of the major record labels show that the $0.99 song is here to stay for a while. Although iTunes Japan does have some tiered pricing (about 10% of the iTunes Japan library has tiered pricing), Apple does not intend or desire to have tiered pricing on iTunes in any other geography. We see this as another indication of Apple's continuous strive to make its products and services simple to use."
How many videos are sold on iTunes per week and are videos any more or less profitable than songs?
We believe approximately 1 million videos are sold on iTunes each week, compared to around 21 million songs sold per week. In other words, about 4% of iTunes downloads are video based. Regarding profitability of iTunes videos, the company recently indicated to us that iTunes videos and iTunes songs have very similar profitability levels. Overall, the iTunes store is run at a level that is slightly better than breakeven."
Will we see full length movies on iTunes anytime soon?
We see a chicken and egg scenario forming with full length movie downloads. What will come first? 1) full length feature film on iTunes, or 2) a larger screen video iPod. It is difficult to say how this scenario will play out. It is also important to look at what value would be gained from having full length movies on iTunes. Right now, a consumer can easily find any full length movie on DVD or on-demand. Apple has focused on TV shows because unlike full length movies, there is a clear value proposition to the consumer and the networks in offering TV shows. For a consumer, if you miss an episode (or entire season) of a show, iTunes is the only way to see it unless you want to wait until the episode comes out on DVD. The benefit to the networks is that this is a new way to monetize original TV content. Ultimately, we expect that iTunes will offer feature length movies on iTunes, but we do not believe this is a top priority for the company at this time."
Apple
announced feature film downloads on September.
Will Apple start selling advertising in their iTunes Music Store?
Napster was recently launched as an ad based business model and there has recently been some chatter in the trade press suggesting that Apple will sell ad space on iTunes. We do not believe that it will sell ad space on iTunes. In addition, conversations with the company have pointed to a continuation of an ad-free iTunes. There are some podcasts that sell ads, but we believe Apple knows the value of an ad free experience and will not sacrifice long-term customer satisfaction for a near term pop in ad revenue."
Why will the release of the iBook not lead to another transition quarter?
While Apple had considerable problems getting a reasonable level of inventory within the first several weeks following announcement of the MacBook Pro, we do not expect to see similar issues when the iBook is launched. We believe Apple wanted to release the MacBook Pro in conjunction with Macworld '06 and, we believe, the company was, therefore, forced to announce the product before it was fully prepared. With the iBook, Apple does not have to manage around a set tradeshow date and can simply announce and ship the product when it is completely ready."
What will Apple do with Mac pricing in the coming years?
Apple has indicated that it will not look to gain market share by lowering price and negatively impacting margins, but will look to gain share by making the highest quality product available and continuing to charge a premium price, assuming consumers will pay for quality. The product that Apple could really try to gain market share with is the Mac mini, which is the lowest priced product in the Mac lineup. We were surprised that Apple raised pricing (from $499 to $599) on the Mac mini when it transitioned to the Intel platform, but in fairness to Apple, the Mac mini did get some upgraded features with a 1.5GHz processor, up from 1.25GHz and the inclusion of Front Row. We see the Street's fixation on market share as an overly simplified approach. We believe Apple will address the market share challenge by trying to create the best products and selling them at an "appropriate" price."
Why is Boot Camp important?
Boot Camp targets the potential Mac buyer who has one or two applications (ex: game or work related application, etc.) that has to be run in Windows. Now the customer essentially has two computers in one. Additionally, Boot Camp is a safety net for those consumers who are thinking about buying a Mac but have been concerned that they would not like the Mac OS."
Will Apple license the Mac operating system?
Apple has stated that it has no intention of licensing the Mac operating system. Also, the company has said it will not sell or support the Windows operating system, despite integrating Boot Camp into the next version of the Mac OS (Leopard), which will likely be released in early 2007. Despite the comments from the company on the subject, we believe there is a small chance that Apple will sell the Windows operating system either in its retail stores, or less likely, as an option when buying a Mac."
What caused the weaker than expected Apple retail store performance in the March quarter?
Apple retail store revenue was down 41% from the December 05 quarter to the March 06 quarter, compared to up 2% from December 04 to March 05. We believe the March quarter was negatively impacted by the transition to Intel. When Apple launched the new iMac with Intel and announced the MacBook Pro at Macworld in mid-January, all of the Apple retail stores shifted the marketing focus to Intel. Our checks with 60 Apple retail stores throughout the quarter indicated that Apple retail stores did not have inventory, even for display models, until the first week of March. In other words, consumer awareness of the Intel shift was high, but there was virtually no availability of the MacBook Pro and limited availability of the iMac for 75% of the March quarter. We believe the aggressive marketing of Intel based Macs had a negative impact on iBook sales as well. We now believe that the MacBook Pro availability is high, based on our Apple product lead time tracker, which evaluates changes in shipment times for various products."
What should we expect from Apple retail stores this year?
Apple has stated that it will look to add 30-40 retail stores per year. Most stores added will be in the U.S., with a secondary focus in Europe. Adding 30-40 stores this year would bring the total number of Apple retail stores to approximately 175 by year end. While the March quarter was the first ever down quarter for Apple's revenue-per-retail store, the company does expect that metric to rebound and that revenue per retail store will be up in 2006 vs. 2005. We expect a greater focus on switching to Mac in the retail stores this year vs. prior years. Apple has recently started a PC-to-Mac switcher ad campaign, and we believe in-store marketing will be heavily weighted toward this theme and less on the iPod."
Why are the Apple retail stores so unique?
The difference between Apple retail stores and other stores is that Apple is hoping the real relationship with the customer starts when the customer is buying the product and is at check-out, while with other retail stores, the relationship with the customer ends at check-out. The goal of the Apple retail store is to move customers from making a one time purchase into becoming ongoing participants in the store. Apple wants people to keep revisiting Apple's offerings. Pro Care is an example of this: at $99 a year Pro Care is essentially a membership to the Apple store and all the resources that are available at the store. While the company does not disclose attach rates, we estimate about 25% of people who buy a Mac in an Apple retail store will buy Pro Care. If you assume that Apple will sell 200,000 Macs in its retail stores in 2007, that is 50,000 members at $99 a year, or $4.9m in income from store memberships. We believe the retail strategy gives customers the ability to go deep (Genius Bar and Studio) and, ultimately, buy more Apple products. It is the strong Apple service element that is really driving more revenue per customer. As a sidepoint, Apple is starting to create a more definable career path for its retail store workers (more full time positions) to try to retain its top employees."
What will Apple's marketing look like over the next several quarters?
Over the past two years, we have seen that Apple's advertising in print, on TV, and on the web has been almost entirely focused on the iPod. The retail stores, before January of 2006, typically showcased iPod advertising in the front windows. Based on comments from Steve Jobs at the recent Apple shareholder meeting, we believe that in the next twelve months Apple's advertising strategy will be a 50/50 mix between iPod and Mac. We believe this could have a positive impact on the halo effect. New Mac ads are just starting to appear with a marketing campaign that is looking to entice PC-to-Mac switchers."
What is Apple doing with its >$9 per share in cash?
Apple wants to take a conservative approach to its use of cash and will keep much of it on hand. That said, the following uses of cash are underway or upcoming: $500m in pre-payment of nand flash, $350m stock buyback (essentially for sr. level management), and $50 million for a data center. Other uses of cash going forward: nand flash, new campus, and possibly a stock buyback. CEO Steve Jobs did specifically indicate at the company's recent shareholder meeting that Apple has no intention of paying a dividend.
What is the reasoning behind the new Apple campus in Cupertino?
Currently, Apple's primary campus is 32 acres and houses 6 buildings. There are another 8 buildings housing Apple employees within several minutes of the primary campus. Apple has found 50 acres that it was able to purchase and intends to use as a second Cupertino campus. The second campus is situated about 10 minutes from the current campus. Apple will consolidate much of the personnel that is currently spread around in buildings that are not on the main 32 acre campus. We estimate about 60%-70% of the new campus will be used for the relocation of people in the 8 buildings that are not on the primary campus and 30-40% of the new campus is intended for company growth. The company has indicated that the key reason for the new campus is to increase efficiency (employees will not have to drive between campuses).
April 25, 2006
Apple's iPod hold all 10 spots in Amazon.com's Top Seller List for portable MP3 Players and All Electronics:
We believe the increase is noteworthy given that the last time we recorded 10 iPods in the Top 10 occurred on Sept. 9, 2005, prior to the holiday shopping season."
Regarding 8 Macs in the Amazon.com Top 10:
The 8 in the Top 10 remains at the upper end of all observations since we began tracking the Top Sellers. For a point of reference, there were 5 Macs in the Top 10 one year ago. We believe that increase is primarily due to the recent launch of the new Intel based iMac and MacBook Pros.
Apple.com has had a significant increase in 'Reach' over the past quarter, which we believe is mainly the result of Apple's new product launches at Macworld on January 10. Apple's 3 month average traffic rank of 45 on April 20 is the best value that we have observed for apple.com since we've tracked the Alexa data.
Similarly, Apple's 3-month average reach of 13,255 on April 20 is the second best value that has been observed (high was on 13,300 on March 1). While we realize web 'traffic rankings' and 'reach' are not perfect measures of actual sales, we believe they are a decent indicator of overall mindshare."
April 20, 2006
Munster believes Apple will launch higher capacity iPod nanos, such as 8GB and 10GB models, later this year:
We expect to see a higher capacity iPod nano in the market in late summer or early fall. Releasing new nanos during the back-to-school timeframe would allow Apple to capitalize on this seasonally stronger buying period, but, more importantly, we need to see the products in the market by October-November to take full advantage of holiday buying."
The second generation iPod nano in 8GB capacity is announced in September.
No 10GB nano is announced.
Regarding a video iPod with a larger screen:
Apple's strategy could be to wait for increased availability of video content on iTunes, such as feature film, which would likely cause the company to hold back on launching in 2006."
Munster predicts Apple will not announce an Intel iBook (MacBook) until July:
Apple's guidance for the June quarter does not appear to factor in an uptick in iBook, adding to our confidence that the new iBook won't ship until July."
The 13.3" MacBook is introduced in May, not July as predicted.
Munster believes Apple will not release a new PowerMac until the September to November timeframe
Quad-core (2 x dual core) Intel Mac Pro is introduced in August.
Munster believes Apple will ship Mac OS X 10.5 Leopard at Macworld in January 2007.
Munster says Boot Camp will be "the most significant new feature" in Leopard.
March 21, 2006
Regarding a new French copyright bill that would require online music services and digital audio players to open DRM technology to competitors' devices and services:
Given 61% of lawmakers in the French National Assembly voted in favor of the new online copyright bill, we believe the French Senate will vote for the bill and it will become law. This will force Apple to open up iTunes (FairPlay DRM) to competing device manufacturers if the company continues to operate in France."
Munster says Apple is more likely to drop out of France than open FairPlay up to competitors:
While this sounds like a drastic move, we believe it would not materially impact business. We estimate that approximately 20% of iPod and iTunes sales occur outside of the U.S. The French market alone is likely less than 2% of iPod and iTunes business.
In the end, we believe that even if we are wrong and Apple does open up iTunes in France and other geographies, iPod sales will not be measureably impacted. Over the last several years, we have seen that, despite the presence of many highly functional online music services, sales of non-iPod devices have not taken off.
Apple would be at risk to losing some iTunes business if similar laws to the proposed French online copyright bill were passed in other geographies, but it is important to keep in mind that the profitable component of the 'portable device + music service' equation is the portable device and a loss of some portion of music service would not have a dramatic impact on bottom line results."
March 16, 2006
We would be buyers of Apple on today's pullback given we believe iPod demand will accelerate in mid-2006, based on upcoming positive seasonality and new form factor iPod's. Additionally, we believe Apple will benefit from the new Intel-based Mac's, along with what we estimate to be a 75% chance of a iPhone in the next 12 months."
March 7, 2006
In our checks over the last several days with 40 Apple retail stores, we found only 4 stores that had the MacBook Pro in stock. Of the 4 stores that had stock, there were generally only 1-3 MacBook Pros in the store. As has been the case with the last several major Apple product releases, the company is having a hard time making the products readily available to buyers. The good news is that demand for the MacBook Pro is clearly not an issue.
Outside of the MacBook Pro, our checks two weeks ago with Apple specialist resellers indicated that they are not experiencing a significant slowdown in Macs due to customers waiting for Intel-based Macs and iPod availability is significantly better than it was during the December quarter, while iPod demand is only down 'slightly,' not 'significantly' from December to March."
February 28, 2006
Apple announced two new/updated products, both of which were primarily expected by the Street. Our take on the event is that the release of these new products is a positive, given we did not have them factored into our model, but the Street was generally looking for more product releases, or at least more significant products to be announced today.
While the new Mac mini can be hooked into a television, we believe the eventual integration of AirPort for wireless video transfer will provide Apple with all the pieces to make a push into the living room. Looking at the overall Mac line, with the Intel based Mac mini, half of all Macs offered by Apple now have an Intel processor."
Between the iPod Hi-Fi and some new iPod cases, it appears Apple is trying to directly capture more of the revenue that is being generated by the "iPod economy" that the company has created."
February 24, 2006
Our checks with Apple specialist resellers last week indicated that they are not experiencing a significant slowdown in Mac sales due to customers waiting for Intel-based Macs and, outside of Macs, iPod availability is significantly better than it was during the December quarter, while iPod demand is only down 'slightly,' not 'significantly' from Dec '05 to Mar '06.
It is important to note, however, that our extrapolation is based on only one month of data (January) in Apple's March quarter.
Given Apple's current trajectory, legitimate competition in these markers in 2007 is unlikely. While seemingly aggressive, we expect Apple can outperform the competition for multiple years, assuming the current pace of innovation continues."
February 7, 2006
We believe the stock has sold off primarily based on investor perception regarding the potential for an air pocket in growth over the next 1-2 quarters due to the Intel transition. Many investors are concerned that growth from existing Macs will slow as customers wait for new Macs and many also anticipate that the transition will be drawn out on the professional side by a lack of readiness from major software vendors such as Quark, Microsoft, and Adobe.
To look at a potential short-term trough in these curves and extrapolate the business based on this period is short-sighted in our minds. We believe a slight air pocket is inevitable in front of all new product releases, but this scenario is factored into Mac estimates and we do not believe the transition will lead to Apple missing numbers. We see now as the time to get positioned for the next peak as Apple's various growth curves get closer to aligning themselves again."
January 19, 2006
Our research showed the Intel slowdown in December was a reality, but muted. The March quarter will likely benefit from pent-up demand around the new Intel-based MacBook Pro, which should more than offset the impact of customers waiting for Intel-based PowerMac and iBooks.
We believe this is a legitimate reason for a conservative outlook, but we would also note that Apple has exceeded its stated revenue guidance by an average of 12% for the last 3 quarters.
While 2005 was the year of iPod growth, we believe 2006 is poised to be the year of both iPod growth and, more importantly, Mac market share gains."
Munster expects Apple to make an entry into other product categories, such as mobile phones and consumer electronic entertainment devices, possibly by year end.
Apple did not enter the mobile phone market or release any other non-iPod consumer entertainment devices (excluding the iPod hi-fi).
January 13, 2006
Given Apple's current trajectory, legitimate competition in these markets in 2007 is unlikely. While seemingly aggressive, we expect Apple can outperform the competition for multiple years, assuming the current pace of innovation continues."
Piper Jaffray expects Apple to annoynce a 2-for-1 stock split soon. Apple last split its stock in the $80 range.
No stock split is announced. In the following 6 monnths, Apple stock price will decline 40% to a low of $50.67 on July 14.
January 4, 2006
Why, despite the run in Apple, are we highlighting it as a top pick? Investors believe the easy money has been made, but we see more upside potential in Apple's business, and sentiment suggesting that growth has peaked leads us to believe that Apple shares will respond positively to any outperformance."
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