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Analyst: OS X Coming to iPod

by , 8:15 AM EDT, July 9th, 2007

While Apple's public focus recently has been on the iPhone, the company has likely been focusing on the iPod behind the scenes. Piper Jaffray analyst Gene Munster expects consumers will see the fruits of those labors before the end of the year in the form of new iPods with iPhone-like features and a new operating system: OS X.

"We believe the iPhone reveals much of what the iPod will soon be. Specifically, we expect Apple to release high capacity iPods based on OS X sometime during or before MacWorld '08 in January," he said. "These iPods will likely have touch screen media features similar to the iPhone, but will not have the wireless phone or internet features."

Based on his research, Mr. Munster sees iPhone buyers as cell phone owners looking for a better smartphone. For these people, the iPod features are an added bonus. iPod owners, however, are looking for Apple to release better iPods, so for now are looking at the iPhone. iPhone sales may be eating into iPod sales right now, but that would likely change once new iPod models are released.

iPhone margins could also see a boost once new iPods are released. If new media player models do sport some of the same technology found in the iPhone, economies of scale will have a positive effect.

Some analysts have estimated that iPhone gross margins could be as high as 60 percent -- a number that Mr. Munster feels is skewed to the high end because the majority of iPhone customers bought the 8GB model on launch day.

He added "We believe iPhone margins are inline or slightly higher than corporate averages of about 30 percent. However, if future iPods use similar parts and software, the OS X-based iPods will add economies of scale to the iPhone business" and will ultimately improve gross margins and Apple's bottom line.

Mr. Munster is maintaining his "Outperform" rating and US$160 target price for Apple stock. Apple is currently trading in the pre-market at $132.62, up 0.35 (0.26%).


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Observer Comments

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Close Name:Intruder -   TMO Mac Specialist Posts: 3063 Joined: 07 Jul 2004
Subject:

Interesting. Rumor sites were reporting this last week. Now "analysts" are touting it.

Is that how analysts work these days? See what the rumor sites are saying and then hawking it as the next trend?

View Name:Guest
Subject: No Internet Capabilities?
View Name:Guest
Subject:
Close Name:Biff Posts: 1479 Joined: 08 Apr 2004
Subject:

Intruder, that's all analysts have ever done. Traders often don't have time to troll the rumor sites, so they rely on over paid people who are essentially news agregators.

First guest post: Not sure why I didn't think of this before, but you got me thinking about the end goal of OS X on iPods. What's the point that they are shooting for? You're talking about a more advanced standalone device with Wifi. Sounds an aweful lot like a PDA. And we all know what happened to those once PDA's with integrated phones came out. I'm starting to wonder if the end result is the eventual demise of the standalone iPod once storage capacities are in line. At least the higher end models. I could still see a market for the shuffle for sure.

View Name:Guest
Subject: Internet Capabilities
Close Name:Biff Posts: 1479 Joined: 08 Apr 2004
Subject:

I understand that you want such a device and I'm sure such a thing might come to pass initially while Apple develops their long term goal. I understand that you don't want to be tried down to a cellular contract and therefor you think many others feel the same way. But how do you explain the disappearance of PDAs?

People will have forgotten the 4 pillar speech long before this all comes to pass. There are many unknowns that Apple will have to discover along the way. You're talking about the here and now and I'm just pondering the long term.

View Name:Guest
Subject: os x ipod should have email and web
View Name:Guest
Subject: Not so fast, Biff
View Name:Guest
Subject: I know I am in the Minority
View Name:Guest
Subject: Hate my phone, too
Close Name:Bosco Posts: 999 Joined: 03 Jun 2002
Subject: But will it run Linux?

OK, I will answer my own question. Of course it will. You just run Parallels then install Linux in a virtual machine. Sweet!

View Name:Guest
Subject: iPods are only for music
View Name:Guest
Subject: Yessiree...
Close Name:zahadum Posts: 4 Joined: 15 Oct 2001
Subject: the ipod is still a viable discrete product category

(1) the ipod has a distinct value as a storage device - the nexgen disk-based ipods will easily hold 120GB, with room for one more upgrade cycle after that to 160GB (most of the manufacturers of 1.8" products have their cancelled plans for any further increases).

it will be several years yet before the price of flash is economical for large capacities compared to 1.8" HDD.

* apple charges a $100 increment on the iphone just to move from 4GB->8GB (the BOM for the difference is $20 ... or $5/GB).

* the retail cost of the new, dedicated 64GB SDD from korea is nearly $500 (apx $7/GB) - and that is just for a memory device with no display, radio, gpu etc.

* the BOM for an 80GB HDD is apx $100 (which represents 61% of the ipod's price; obviously storage is largest single component in an ipod) ... which is basically in the range of $1/GB.

In other words, a 100GB+ SDD would have a input costs of > $500 just for memory - before including the costs of other componets and for apple's ample margin ... ie a large storage device would have a selling price of at $1000! (not to mention the impact on form-factor: at present korean 64GB sdd are only available as a 2.5" part).

Assuming that moore's law applies to equally to (flash) memory as it does to (logic) processors, then it will take at least another 36 months for Flash sdd prices to reach parity with the prices of 1.8" hdd (and perhaps other 2 years to reach parity with 2.5" hdd). Moreover, during this interval the price of 1.8" hdd will continue to fall as the manufacturers recoup their fixed costs out of what will be the last production cycle for 1.8" technology; on the other hand, as Flash capacity continues to ramp up, sdd will also benefit from falling prices - so the two effects are probably a wash.

Net net, it's still probably a 24-36 month timeframe before 180GB Flash has an oem BOM less than $100.

And bear in mind that as SDD capacities start achieving a practical size, the demand for Flash will skyrocket in laptops - so there might even be supply constraint issues during first couple of years of widescale SDD (of course apple is in the unique position of having alot of leverage with long-term Flash contracts that probably lock in both supply & price on favourable terms -- which is one of the soft entry barriers that its competitors face).

Bottom line: the (video) ipod - ie a HDD storage device - still has release 2 cycles left in it before the iphone could even possibly begin to "compete" with it as a large scale storage device (and yes, i am totally ignoring the appletv paradigm that network bandwidth makes raw physical local storage much less important for media devices).

(2) the ipod has a distinct value as a potential mobile game platform.

recent news suggests that apple has licensed a nexgen gpu from a well-known uk oem (apple already uses its predecessor gpu in the current iphone). one wonders why apple purchased an advanced gpu start-up comapny a few years ago -- i guess this was the plan.

if the ipod uses a hybrid of 1GB sdd and 120-160GB hdd, the impact of gaming on the battery will not be excessive (certainly the iphone is already being positioned distinctly as the superior power management experience for smartphones; hence the delay for 3G).

with a full osx/openGL programming environment available, it is very easily to contemplate the segmentation of the iphone as a hybrid platform;but the ipod/igame/isim/iplay platform as a media-centric platform ... the ipod adds better graphics & the iphone adds better radios, etc.

(3) the ipod has a distinct value as a tighter fit with appltetv - for delivery of HD.

NOTE: the iphone dock does NOT have any video-out (dvi or hdmi).

it is easy to contemplate an enhanced video ipod mid-range model (120GB) that supports processing of output to 720p and a high-end model (160GB) that supports 1080p (assuming the entry-level model at 40GB supports full 480p) -- note: output refers to external large screens not the built-in (albeit much higher res) handheld display.

existing hi-res displays already have higher resolution than the iphone does, so these could be a differentiator for the ipod as a distinctly media device ... we could expect near 300dpi during the remaining 2 product cycles (ie before the transition is finished from two distinct product line - hdd & sdd - into one unified super hybrid product 3 years out).


Conclusion: as long as apple adds core osx features to the ipod -- large display, bluetooth, wifi & infra-red (hello remcon with a touch interface!) -- then there is still heaps of room to differentiate ... many iphone buyers will still want to have an ipod, and vice versa; while there will also be many who only want one of the other - which is OK too.

The distinct aspect of the ipod - storage - can not be challenged by the iphone for at least 2 or 3 years; even then, it is till possible to imagine different aspects being bundled into different product groups (based on the bias or concentration of of their BOM's).

ps: it is a crying shame that apple doesnt seem t recognize the lost opportunity for both iphone & ipod as CBT platforms! .... especially for language teaching! ....

if these platforms had TTS and vox reco (especially for asian languages), apple could make inroads with these embeded versions of osx that it would not (so easily) be able to make if having to sell conventional laptop/desktop version of osx! China & India (and to a lesser degree korea & japan) need to have a clear, compelling value-add for selecting $300 ipods & $500 iphones (given the number of apple design clones already in those markets & their greater committment to wireless).

The teaching/learning function of ipod & iphone is the most under-exploited, multi-billion dollar opportunity - much greater than even niches like nike!

View Name:Guest
Subject: There is no way the iPhone could replace the iPod
View Name:Guest
Subject: iPod as PDA without phone
Close Name:Bosco Posts: 999 Joined: 03 Jun 2002
Subject: Re: iPod as PDA without phone

Oh, I totally agree about the T|X. What a sweet little device. By keeping it separate from the phone, it allows you to take your phone to the beach or the gym where you might not want your $300 or $600 device.

Palm also has its Foleo coming out this summer. That guy's gonna be a category changer.

View Name:Guest
Subject:
View Name:Guest
Subject:
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