updated 11:00 am EST, Wed February 8, 2006
Apple not threatened
Despite rampant speculation that Apple will enter the world of digital film downloads, Apple's future likely hinges on sales of its hardware and software. Analyst Shaw Wu of American Technology Research said that digital media plans or services from "pure internet service companies," such as Google, Yahoo, Ebay, and Amazon are unlikley to affect Apple and its stock price because Apple relies on a "store and forward" service--embracing the pay-per-song model rather than the more demanding streaming or subscription services offered by many of its competitors. Wu notes that while its competitors may be able to offer better or more internet resources for any digital media music or video service, Apple manages well because it has outsourced most of its "backend services" to companies such as Akamai and Speedera and that it may have favorable long term contracts for media delivery. Wu also estimates that the average number of songs downloaded per iPod user has increased by about 50 percent.
"Longer term, if Apple chooses to move to video streaming, its costs may rise. But we believe Apple's long-term business model will likely remain similar in that the bulk of its revenue and profits will come from hardware and software, as opposed to the internet service."
While its pure internet competitors may have online resource advantages, many are scrambling to keep up with Apple's ability to deliver seamless user experience. Google has admitted making mistakes during the launch of its Google Video store, one of the major competitors to Apple's iTunes, as it said that its television shows available for sale were not promoted well enough. In addition, Yahoo yesterday updated its digital music jukebox software to deliver new ease-of-use and home sharing/networking features.
Other reports have speculated that Amazon is readying a streaming film service in order to drive DVD sales.
Apple focused on hardware and software
Apple's future is dependent on its hardware and software profits, according to Wu. In a research note to clients, he wrote that Apple's livelihood is based on its ability to complete its transition to the Intel architecture successfully, profit margins on its hardware products, and the ability to bring innovative products to market.
"Unlike most internet companies, Apple is not dependent on its internet service alone for revenue and profits. Apple is essentially break-even as a reseller of content (music and video) and we believe will remain this way for the foreseeable future."
Some speculated that the recent price cuts on Apple's entry-level iPod shuffle may hurt margins, however, Wu says that continued deflation in the flash-based RAM market has allowed Apple to pass along some of the savings to customers without hurting its margins.
iPod users download more songs
iPod users are also downloading more songs, according to the firm. Wu estimates that iPod users are downloading about three dozen songs, up almost 50 percent from a year ago estimates of two dozen songs, according to the report obtained by MacNN. The majority of users' music libraries, Wu says, is from other sources, including their own private collections.