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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.

Observer Comments

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Close Name:Biff Posts: 1479 Joined: 08 Apr 2004
Subject:

Quote
"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.
So the iPod can appear as a headset to my phone damn yous! Damn yous all! Oh well, thats what 3rd party add-ons are for I guess.

Close Name:Guest
Subject: Please clarify

For reporting purposes, the first quarter of 2005 for Apple started this month. Exactly what does Milunovich say? The exact quote you gave says "first quarter of 2005", which is vague, and could actually be tomorrow by Apple's reckoning.

Does he specifically say "calendar year 2005" or "color iPod in the first half of next year" or something like that? Or is that your choice of words?

K

Close Name:Guest
Subject: "That's really dumb"

Came across this quote about "MCE-braindead" server in the home from Phil Schiller in an Oct 2002 interview with Infoworld: (www.infoworld.com/articles/hn/xml/02/10/18/021018hnapple.html:

"InfoWorld: Are there plans for any kind of collaborative environments that would leverage these wireless technologies?"

"Schiller: We've already demonstrated that in two very real ways. When we introduced Rendezvous, we did the demo of iTunes. Steve [Jobs] is on stage, he's got a desktop, he's looking at iTunes, he's got his music library, then I walked up on stage, opened up my notebook, and I have a music library as well. All of a sudden Steve's library dynamically grew and now had the music from his library with my music in it as well -- in a completely legal fashion, because we're not copying anything. You can just see it as if it's one library. This is the real answer to what you need, for example, in the home. A lot of companies have played around with the idea of a server in the home. That's really dumb. I have yet to meet a consumer who said, "What I really need is a server to manage." You have these computers [with] more power than any server you could afford to buy for under $1,000. You don't need more power, you just need a way to make this completely seamless and invisible."

Also this from Tevanian and Schiller about DRM:

"InfoWorld: Microsoft is coming out with Windows Media Player and DRM [digital rights management] and they seem to have plans to incorporate the Palladium infrastructure as part of that solution to lock down the computing environment from beginning to end. What's Apple's take on this?

Tevanian: What's most important to us is what do consumers want and what are consumers entitled to? We're very intimately aware of the issue of illegal use of these things vs. legal use and who's paying and who's not. We're as big a stakeholder as anyone from that perspective. But we also believe the most important thing is not really how do you make sure people are always doing what's legal by forcing them to only do things that are legal? The bigger question is, How do you provide them something that they really want? For example, I think most people would agree that the reason many people "steal" things over the Net is because it's so easy to do and it's the easiest way to get the things [they want]. Well, imagine if it were easier to pay a fair fee and get the thing. Our view is, Let's look at how we provide things that are the easiest for consumers, because by and large people want to be honest. And by and large, people will pay for what they're getting.

Schiller: Our attitude has always been you've got to protect the content owner's rights and the consumer's rights. We think you can try to do both. We did that with the iPod -- we went down the middle safely. A second part of this is we fundamentally think that an attempt to create an unbreakable system is foolish. Microsoft has more than almost anybody [who's been] trying to build encryption schemes into DRMs. And as we saw with the last version of Windows Media, it was broken before it shipped. So we think the No. 1 task is not to make an unbreakable system that tries to keep ahead of criminals, because criminals are going to find a way to break through anyway. What's important is to find the products and services that help honest people stay honest. And people haven't focused on that."

Close Name:Guest
Subject: Waiting for 2005…

I thought the year was going by too fast. Now that I have to wait till 2005 for my 60GB color iPod, it is going too slow. Sigh. Waiting for the perfect iPod has been trying. I guess I just need to go ahead and buy one.

Close Name:Guest
Subject: Understandable

If Apple held off on new iPods until Jan at MWExpo, that would be understandable given the current demand for iPods and iPod minis. With the momentum they have and the HP side just getting going, they likely don't need anything else right now to maintain their 92% market share.

That would allow the new iPods to add some juice to the usually-slow post-Christmas quarter, and thereby continue Apple's momentum.

The only thing is that those 60GB drives were rumored to have been ready months ago, with large quantities shipping in Q4. And Toshiba (who makes the hard-drive) is or will be shipping an MP3 player using it real soon. Although Toshiba is the only one to announce, so maybe Apple has an exclusive agreement with them so that Toshiba will not sell the 60GB to anyone else until Jan.

K

Close Name:Guest
Subject: MCE wins here

So I guess a home media server (iServe?), that is not just another Mac, is dumb.

Well, then Apple better fix it so that one Mac is able to have at least different songs streamed to two different locations in the house, and release that wireless remote control for Mac-iTunes. Because at least in those two "It's the music, stupid" areas, the MCE has Apple's iTunes and Airport Express beat.

Close Name:Guest
Subject: 60 GB ready

If the 60 GB drives are ready, then it might make sense for Apple to hold off for awhile so they can stockpile them and not run short when demand would exceed supply otherwise.

Close Name:gslusher Posts: 2088 Joined: 13 Nov 2002
Subject: Kinda got the date wrong on the Color iPod = iPod Photo

In the article:

"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."

Uh, how about the very NEXT DAY? See Apple's page:

http://www.apple.com/ipodphoto/

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