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Merrill Analyst: Color, Flash-Based iPods Coming Early '05; Apple Doesn't Deny

First on TMO - Merrill Analyst: Color, Flash-Based iPods Coming Early '05; Apple Doesn't Deny

by , 3:00 PM EDT, October 25th, 2004

Apple Computer will likely introduce a flash-based iPod in early 2005 and a color iPod in the first half of next year, Merrill Lynch analyst Steven Milunovich predicted Monday in a 10-page report to clients obtained by The Mac Observer. Mr. Milunovich focused primarily on future iPod products, of which Apple did not deny any of some recently speculated announcements and gave guidance of its future product family direction.

"We believe Apple could introduce a flash memory-based iPod in the first quarter of 2005," he wrote. "The new iPod would signal a departure from the thinking that an iPod should hold all a person's songs. We estimate that Apple might be able to charge US$149 for a 256MB (60 song) unit. We think Apple could quickly become a significant player in the fragmented $2.6 billion flash MP3 market."

Mr. Milunovich also wrote he expects a flash-based player to command a 20% gross margin.

The Merrill analyst also said a photo-focused iPod with color display from Apple "makes sense".

"Apple does not comment on future products, but management did not reject the idea of a Photo iPod (when asked)," he wrote. He also said Apple management "did express surprise that Sony's new portable photo player does not have A/V (audio/video) output jacks." It is expected a color iPod would have a combination A/V out jack to allow users to interface with a color television to view images.

Mr. Milunovich reiterated predictions made by a number of other analysts in recent weeks, including Thomas Weisel market analyst Jason Pflaum. What is different about Mr. Milunovich's comments is that he predicted the color iPod will debut next year and not for the 2005 Christmas buying season. This contradicts reports of other Web sites.

Mr. Milunovich's comments came after recently visiting with Apple's Chief Financial Officer Peter Oppenheimer, Vice President of iPod Product Marketing Greg Joswiak, and Chief Software Technology Officer Avie Tevanian. "We came away with continued confidence that Apple is pursuing realistic fiscal goals and that innovation is not slowing," he wrote.

Apple hints 'no' on Media Center, Bluetooth iPod and Wi-Fi iPod

Apple management told Merrill Lynch that while the AirPort Express has proven to be a winner as the company's first digital home device, consumers are not yet buying into an all-in-one digital media center that combines a personal computer, with a television and stereo system.

"Apple executives called Microsoft's Media Center PC "braindead", citing slow sales of less than 500,000 units and "poor execution".

As for a video-based iPod, Apple management gave signs that such a device is no where in Apple's future. In addition, Mr. Milunovich said a wireless iPod based on Bluetooth technology is also "unlikely" because "the data rate may be too slow," he wrote.

"Apple management does not see where Bluetooth would be used other than possibly for wireless headphones, but then the headphones would need batteries," he wrote.

Apple execs also gave Mr. Milunovich guidance that WiFi-based products are also not in the cards. He wrote that current WiFi speeds are too slow for audio and video and "energy requirements for WiFi are not significant for a portable device."

Merrill Lynch maintains a 'buy' rating on Apple stock and US$49 price target. "If iPod success spills over to Mac sales, there could be further upside to our estimates," he wrote.

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