updated 10:40 am EDT, Wed September 13, 2006
"Showtime" was good enough
Apple's special event yesterday fell mostly in-line with investor expectations, solidifying rumors of movie offerings via its iTunes Music Store and new iPod nanos. The company's move into the living room with its unexpected iTV set-top box device caught the attention of four industry analysts, all of whom see the move as positive for Apple in its strategy to enter the home entertainment market. American Technology Research analyst Shaw Wu believes the Cupertino-based company made less apparent material progress in key areas of battery life with regard to its video iPod and iPod nano, as well as higher resolution video and user interface elements to strengthen its iPod + iTunes position.
"To us, battery life has been the central issue with the previous video iPod and also in the development of its next-generation widescreen video iPod," Wu said. "With the advancements in battery life of over 70 percent, we believe Apple is one step (or perhaps two steps) closer [to] adding widescreen and/or Bluetooth capabilities."
Analyst Richard Farmer of Merill Lynch believes Apple's "showtime" was good enough, and raised his price objective from $72 to $88 based on higher estimates and beliefs that the combination of existing and coming products will likely create earnings power in excess of $4.
"We think the improvements to the iPod line, though incremental, are enough to keep Apple's devices ahead of competitors in feature-adjusted price/performance in the intermediate term," Farmer wrote in a research note obtained by MacNN. "Apple did not announce a full-screen touchless interface iPod, nor WiFi support for iPods, which may be disappointing to some investors with more aggressive expectations, though we expect these innovations to emerge in coming quarters."
The analyst continues to expect an iPhone product announcement from Apple by the second quarter of 2007, and notes that the upcoming iTV media hub along with the addition of movies to iTunes make Apple's offering more complete and increase the probability of consumers choosing Apple as the media management device standard.
Mobile phone market hopes remain strong
Apple's potential earnings as a result of its expected entry into the mobile phone market could eventually add more than $0.90 to the run-rate of Wall Street estimates of around $3.09 in fiscal year 2008, according to Farmer.
"In the long run we see fewer structural constraints on share gains in mobile devices (including phones) than exist for Apple versus Windows in the PC market. We also believe our Mac share gain assumptions are conservative."
Merill Lynch raised its Fiscal year 2008 earnings-per-share estimate from $3.17 to $3.54 to reflect one point of share in mobile phones, while also accounting for iPod cannibalization.
Apple cements its leadership in portable music market
Needham & Company analyst Charles Wolf held a similar view to other analysts, chalking up Apple's special event as living up to its billing. Wolf believes that Apple's most significant introduction was a dramatically improved version of its iTunes software, which the analyst says represents the most significant barrier to competitors ever challenging Apple's dominance in the mobile multimedia market.
"In view of the rampant speculation on rumor sites, it would have been next to impossible for Apple to pull a rabbit out of the hat," Wolf said. "What the company did do was cement its leadership in the portable music player market and the online music market. After introducing the sale of TV shows a year ago, Apple expanded the service to movies, with Disney as its first content provider."
Apple lays claim to the living room
Apple's announcements during its special event should be a catalyst for company shares for the next three to four quarters, according to Piper Jaffray senior analyst Gene Munster.
Munster believes that Apple's iTV device, coupled with its movie download service via iTunes are the first in what will be a multiple year strategy for the company to target the living room as a new avenue of growth.
"Movie downloads and 'iTv' are the initial products in Apple's strategy to take over the living room," wrote Munster. "This is a significant new emerging market for the company."
"We consider the living room as one of the key, untapped consumer electronics markets. We believe that Apple, with more than 50 million iTunes users, maintains the pole position to convert/upsell iTunes users into Apple living room customers (they will purchase Apple hardware and content through Apple)."
The impact to numbers won't begin until the March quarter of 2007, according to the analyst, but the company's move into the living room is significant as it represents Apple's third major addressable market.
The analyst also believes Apple's updates to its iPod nano and the new iPod shuffle are more than enough to reverse the two-quarter decline in iPod sales.