Apple's future: Mac sales growth, subscription model?

Merrill analyst Steven Milunovich said that smaller competitors such as Real Networks and Napster may see more of a direct negative impact by the launch of Yahoo's service. The firm believes that Yahoo's entry into the increasingly crowded digital music space may push Apple to offer its own subscription service later this year, but that Yahoo's service may have its own drawbacks, including Yahoo's use of advertising, the lack of interest in current WMA-supported music players, and a possible backlash when its introductory pricing ends.

"Apple could flick the switch on a subscription model. Yahoo clearly is a problem for Real Networks and Napster, but will it hurt Apple? We do think Yahoo's entry could cause Apple to offer iTunes as a subscription model later this year, especially if there is evidence of share loss. Subscriptions are about 15% of the legal download market with iTunes over 70%," according to the research note.

The research firm also said that Apple's management is seing more evidence of the halo effect, although it did not provide any further details. Merrill "conservatively" estimates that the effect could drive "sustainable growth rate" of Mac revenue by 15-20 percent, based on its model.

Merrill said that a influx of perceived negative news impacting Apple was mounting--citing Bill Gates' recent declaration that mobile phones will replace the iPod as customers' preferred listening device (in addition to the recent Yahoo launch). While news has been affecting

Apple is working to protect iPod profits, according to the firm: "Although we think the iPod franchise is safe for at least the next year, the driver of the stock increasingly will be Mac sales." Merrill reiterated its "Buy" rating with a price target of $51 per share.

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