Thursday, September 06, 2007

Apple's iPods for Holiday 2007

The Million Dollar Question

Can Apple roll out incremental features to its iPod line and get the market excited once again?

The Immediate Aftermath of the Announcement

Apple shares remained stagnant during the event and then closed down almost nine points. This on a day when the company refreshed its entire iPod lineup with new "models."

Did Apple just suffer along with many other tech stocks in yesterday's downtick, or was it something more? Apple CEO Steve Jobs has a wonderful way of making the world think each 'new' Apple product is somehow a first or one-of-a-kind, but most aren't any longer when it comes to the iPod line (save the iPhone, which is easily a revolutionary product).

Basically, Jobs trotted out the same products -- from the iPod Classic to the iPod Nano to the iPod Touch -- with incremental feature upgrades and more marketing glitz than a glazed donut. The market seemed unimpressed, all things considered. But, there's more.

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What say the analysts? The Stock Price?

Apple Inc. (NASDAQ: AAPL) will have to recover from yesterday's announcement of a $200 price cut on the iPhone. Analysts may have now to adjust models and maybe even price targets, although some, like Gene Munster of Piper Jaffray, think it's the right strategy. In the mean while, Apple will also have to deal with the wrath of the first adopters, the ones who ran to get the iPhone on the 29th of June, stood in line for hours and paid $200 more. If you ask me, Apple stands to alienate quite a few of its fan base, the ones who did buy the iPhone for $599.

In a phone interview Thursday, Pacific Crest analyst Andy Hargreaves said Apple's stock declined Wednesday due in part to people adjusting their expectations for the company's revenue and gross margins for the year. Hargreaves doesn't think the iPhone price drop will have a huge impact on Apple financially, because he assumes unit volume will make up for the price change.

Hargreaves added that the sudden price cut -- which is unprecedented for Apple, as it tends to add features to products while keeping prices stable -- might make customers think twice about becoming early adopters of its products.
"When people are waiting outside the store two days ahead of time it becomes a story and they get, essentially, free marketing out of that. If all those people decide they don't want to wait outside the store because they got burned last time, Apple loses that marketing," he said.
Also Thursday, Global Equities Research analyst Trip Chowdhry downgraded his rating for the stock to "Equal Weight" from "Overweight," saying in a client note that the company "is probably unlikely" to meet its goal of selling 10 million iPhones in 2008. Chowdhry also reduced his price target to $130 from $150.

Chowdhry said consumers have reported that the iPhone is missing some key smart phone capabilities like voice calling, and users have noted issues with AT&T's service that include dropped calls and very slow Internet access speed.

He added that some PC-using iPhone owners reported receiving rude customer service at Apple's in-store Genius Bars, after which they returned their iPhones. In a phone interview Thursday, Chowdhry said the price cut means Apple is struggling to get iPhone adopters. And those who already have them aren't happy about the sudden price decline, he said.
"People who bought the iPhone early, stood in the lines -- they are not smiling. They're feeling ripped off," he said.
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RBC Capital Markets analyst Mike Abramsky, in a client note, kept an "Outperform" rating on shares with a $175 target price.
"While the lower price itself was not unexpected, the speed of the cut - coming 68 days into launch - was a surprise; given our recent checks (this week) suggested sustained sales momentum," the analyst wrote.
But Abramsky thinks the cut will pay off in time, because it widens availability of the product, strengthens Apple (nasdaq: AAPL - news - people )'s competitive position and might drive users to upgrade as the holiday season gears up.

Morgan Stanley (nyse: MS - news - people ) analyst Kathryn Huberty likewise said the price cuts could generate strong holiday demand. She has an "Overweight" rating and $150 target price on shares.

JPMorgan Securities Inc. analyst Bill Shope was a bit more concerned about the price cut, saying it could be a sign of slower-than-expected initial demand.

"Yesterday's event gives Apple an impressive product line up for the holiday season, but it also supports our view that margin and iPhone expectations were too lofty," the analyst wrote.

He kept a "Neutral" rating on shares.

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Coupled with the ridiculously capable new iPod Touch -- which has every major feature of the iPhone except for its phone capabilities -- will any other manufacturer stand a chance?

Analyst Tim Bajarin, president of Creative Strategies, thinks not.

"I don't see how anyone can respond to a product lineup like this," he said. "Who out there has the ability to compete with this? Microsoft and the Zune simply can't compete. And Sony's new video Walkmans (announced earlier this week), they pale in comparison."

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With the analyst opinions all over the map, I can't really trust any of them. So it's down to what ...

The Zeitgeist says

But it’s frustrating that the highest capacity iPod Touch holds a mere sixteen gigs, making it an unlikely choice for hardcore iPod fans. The so-called iPod classic now tops out at 160 gigs, but with no Wi-Fi. Why? To get above sixteen gigs or so, you need to switch from flash memory to battery-draining hard drives — and presumably, the combined battery burden of Wi-Fi and hard drive was just too much.

It’s cool to be able to buy music almost anywhere, but in the end, today’s iPod and iPhone selection still represents a compromise, limited by current technology. Ideally, you’d have a eighty-gig-plus iPod or iPhone that would allow you to surf the web and buy tunes at high speed wherever you are — but free Wi-Fi everywhere is just a fantasy, and the iPhone isn’t even capable of running on fast 3G phone networks. Another dream: Imagine paying ten dollars a month for an iTunes subscription — all the music you want, streamed wirelessly, anytime. Give Apple (and maybe a competitor or two) a couple more years, and we might just get there. In the meantime, as singer KT Tunstall told us yesterday at the Apple event, the iPod Touch is “a nice piece of kit.”

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On the Steep Price Cut

Such steep cuts, coming just two months after the iPhone's much-hyped launch, may risk angering the Apple faithful who lined up to buy an iPhone on the day it came out. As Apple customer Rachel Kane, who bought her iPhone in August, said,

"It's not the losing $200 that bothers me. What bothers me is the idea that the company grossly overpriced their product and took advantage of the faithful few hundred thousand who initially purchased the iPhone."
Now what they originally called this end-all-be-all of phones is being price-slashed for the holidays as a stocking stuffer," Kane continued.

Customers aren't the only ones rattled by the price drop. Despite the iPhone grabbing a 1.8 percent share of the smart phone market in June alone, the stock market seems to think that the 33 percent price cut is a sign of weakness: AAPL share prices dropped 7.4 percent for the day.

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Is Anything Missing?

“I know the iPod Touch is cool looking but [without] a 60 gig drive it is worthless to me,” says one comment.

“One thing that is conspicuously missing from the iPod touch (as well as the iPhone) is any sort of games. One would think that the touch-screen platform would be perfect for something like bejeweled or solitaire. Seems odd to me, and is one of the few features missing from the iPhone that most other cell phones have,” adds another.

A third drawback: “No Mail! WTF! That's all I can say,” says one disgruntled commentator on “There's Safari [Apple's web browser] but no Mail!? I don't get it.”

On Times Online, too, most commenters were sceptical. "Instead of introducing new iPods,

Apple should support the thousands (millions?) of broken iPods out there," one reader says.

"My iPod Mini died in August, just 5 months after the warranty expired. So did many other iPod Minis of the same vintage. But Apple refuses to recognize this as an 'event'. Their Tech Support suggested that I purchase a new one."

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Could this be a mistake?

Four Mistakes Apple Made With The IPhone Price Drop

But, what about the rest of us who waited it out and will now profit from the price cut? Personally, I don't see this as a mistake, rather an admission by Apple that the cell phone market is more volatile and capricious than the computer market. Cell phones are bought on a whim, and though $400 is a HUGE whim, it requires less thought (and preparation) than $600.

Will this affect Apple's bottom-line?

$100 returned on 1 million phones - that's a $100 million dent in their profits. But, the price cut will catapult iPhone sales into the stratosphere (comparatively speaking). If Apple manages to sell twice the number of iPhones in the rest of this quarter than was originally forecast, this blip will be just that, and nothing more.

To Conclude

The jury is still out on the new products. I personally think "fatty" is sucky, but I reserve true judgment till I actually hold the new Nano in my palm. I still want an iPhone though, and can't wait till it is untethered from AT&T.

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