Apple's secret holiday weapon: the iPod Touch

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Based upon last week's iPhone price cut and some analyst opinions stating we won't see a 3G iPhone this year, Scott Moritz at TheStreet.com today is predicting a "Cold Christmas" for Apple.

Boy, has he ever gotten it wrong.

First, he argues that the iPhone price cut validates a rumor that Apple was cutting iPhone production in half. Yeah right. Economics 101 says that when you lower prices, demand increases. So Apple would cut production why? Heck, my son even bought a refurbished iPhone over the weekend with his own money, so I'd argue that Steve Jobs' goal of bringing more customers to the iPhone for the holidays is all but assured.

But in my opinion, the real reason Moritz has it so wrong is that he ignores Santa's secret weapon that will put Apple's holiday results over the top. That secret weapon is iPod touch. And our analysis says that is going to be huger than huge.

Why do I think that the iPod touch will be such a hit? Because the iPod Touch

• Already is selling well. The iPod touch is currently the most popular music player on Amazon's list and the #2 top seller in all of Amazon Electronics -- and it isn't shipping yet.


• Instantly offers world-wide appeal Unlike the iPhone, which requires six month carrier certification and blessing in each country in which it will be offered, the iPod touch is a garden-variety piece of consumer electronics. That means that so long as it doesn't spontaneously burst into flame and complies with all necessary packaging and safety guidelines, it can be sold in almost every country in the world within weeks of it being offered in the US.


• Can be sold through distribution. Because of its exclusivity carrier relationship, only Apple and AT&T can sell the iPhone in the US, and no one can yet sell the iPhone internationally. But the iPod touch has no such restrictions. iPod touches will be available at Amazon, Target, Best Buy and countless other stores in the US. You'll also be able to buy them in other countries in such varied venues as Dixon's in London, FNAC in Paris, and 7-11 stores throughout Japan.


• Isn't locked to another company's fortunes. A lot of consumers won't buy an iPhone because they already have a phone with Verizon or Sprint. Or, they may simply know and like their current phone. Or they don't like converged devices. The iPod touch appeals to all these consumer segments that the iPhone doesn't address -- and that makes its available market considerably larger.

So what's our projection for Apple's holiday season? I'll be publishing a detailed analysis in the September Analyzing Apple report (some previous reports are here), but I expect Apple to significantly exceed last year's 21 million iPods sold, and I also expect the average iPod selling price to rise.

There is one open question looming over the iPod touch though, and that's how Apple will recognize the revenue from its sales. Apple amortizes both iPhone and Apple TV revenue over 24 months because of undelivered upgrades to those products, yet normally recognizes iPod sales immediately. Technology-wise, the iPod touch is just like an iPhone and will presumably benefit from many of the same upgrades that happen to the iPhone. And yet, it is an iPod and has no carrier revenue affiliated with it, and therefore, Apple can legitimately recognize the revenue from it immediately, just as it does with other iPods. We probably won't know the answer to this question until the October earnings report, but it will have a significant impact on the holiday forecast.

But regardless of which way the answer turns out, I'm sure TheStreet.com is going to have trouble explaining their forecast of a cold Christmas for Apple come January. They could just blame the miss on global warming. But more likely, it will just be the heat of holiday iPod touch sales.

Technorati Tags:
Apple, iPhone, Marketing, Financial analysis, iPod, iPod touch, TheStreet.com

Apple blows out estimates again

UPDATE: Well, for once I overestimated iPod sales, but only as the result of the NPD market share update on January 4. Apple, Inc. reported earnings after the stock market close, and they actually only sold a few more than 21 million iPods (for very large values of only). That's up 50% year over year in units and a 24% increase in revenue. I also missed on computer units, overestimating notebook sales by 300,000 or so. But my biggest surprise was the increase in net margin to over a billion dollars, which rose from 9% of revenues to 14%, causing my estimate of $796 million to look positively gutless.

So what does it all mean? Well, here's a fairly mind-blowing thought: Apple sold nearly one-quarter of the 86 million iPods in the world today just in the fourth quarter. No matter what Business 2.0 asserts, that's not slowing growth. And while we'll undoubtedly see some change in mix with the introduction of the iPhone in very late Q2 (more likely Q3), I wouldn't bet on growth slowing soon. After all, while the iPhone may need a lot of refining to meet FCC and Cingular requirements, Apple has no such restrictions on marketing a WiFi-enabled touch-screen iPod without cell phone capabilities. And the year has just gotten started.

Full disclosure: I own some Apple stock.

Technorati Tags: Apple, Financial analysis, iPhone, iPod, iTunes, MacBook, Macintosh

Apple's marketing may pay off with nearly $8 billion in revenue

One company that hasn't been cutting marketing budgets is Apple Computer, which was named Marketer of the Year over at MediaPost's Marketing Daily. And NPD released some new data today, showing that Apple increased its market share of the MP3 player market from 45% in 2005 to 57.5% in the five weeks around the holiday season in 2006.

Now this data has some notable omissions. Among them are sales from Wal-Mart (a big factor) and the Apple Stores themselves (a huge factor in iPod sales). And the data only covers five weeks, not the entire quarter.

Nonetheless, the data is probably somewhat representative of the quarter, so I did some estimates of the omitted effects. I predict that the Apple stores will be responsible for about 2 million iPod sales on their own, and Walmart will be responsible for another million or so (these numbers are pulled out of the air, so if anyone has better guidance on what I should use for those two estimates, leave me a comment or send me an email). So I plugged it into my model for Apple financials and iPod sales. And below is what I got:

Category	Units (in thousands)	Revenue (in millions)
Desktops	700	$976
Portables	1,200	$1,637
iPods	23,000	$4,106
Other (Software/iTunes/Periphs)	N/A	$1,220
Total	N/A	$7,938
Net margin	N/A	$760
EPS (basic)	N/A	$0.89
EPS (diluted)	N/A	$0.87

The bottom line: I was a piker in my previous prediction of 20 million iPods and $7 billion in sales for Apple's holiday quarter. Assuming that these numbers are somewhat in line, Apple may see a nearly $8 billion holiday quarter, with $4 billion of that revenue coming from the sales of 23 million iPods.

Full disclosure: I own a small number of Apple shares.

Technorati Tags: Apple, Finance, Financial analysis, iPod, iTunes, Marketing, Opinion, Projections, Stocks, Stores, Zune