CBS MarketWatch lists Apple as a stock to watch on Tuesday due to comments in Barron’s, the popular financial new weekly about the potential for $500 million in sales of music downloads once the Windows version of iMS becomes available.
Actually, in my view, the stated potential for such an exponential increase in music downloads is overblown. Although Apple has a small market share relative to Windows, all market share isn’t created equal. Apple has a competitive market share, perhaps well over 20% share, in the high margin PC market.
That said, the penetration of Macs in higher income homes is far greater than the market share numbers would suggest. IMHO, considering alternative music download services that will compete with Apple’s iMS, I see the potential for perhaps a 4 or 5-fold increase in music downloads once the Windows version becomes available, certainly not a 10-fold increase or more.
But are people missing the point?
Apple is a hardware company. To Apple, based on comments of company execs, the revenue and earnings benefit to Apple of the iMS is the sale of iPods. Most Windows users who might might download a Windows version of iMS are not about to run out and spend $300 or more on an Apple iPod to compliment the service. However, I can see upwards of 500,000 iPods being sold to Windows users in the first year following the release of a Windows version of iMS . That’s more than enough iPod sales to make the music service a good investment.
In rough numbers, Apple maintains on average a 30% gross margin on product sales. That’s $90 on the sale of a 10-gig iPod and $120 or more on the sale of the larger capacity models. An additional 500,000 iPod units sold to Windows users will add more than $.16 to Apple’s earnings before taxes in that 12-month period following the release of the Windows iMS.
Sure there are benefits to the Windows iMS for Apple. Presumably the Windows iMS will require QuickTime 6.2 or later. That’s millions of new QuickTime installations on Windows boxes. And, the high-profile service adds prestige to Apple’s brand name and increases brand recognition. One can presume the service will also attract a small number of Windows users to the Macintosh platform when it’s time for them to upgrade their machines.
Looking at the numbers, $500 million in song downloads would mean roughly $170 million in gross revenue after payments to the record labels. It’s a lot of dollars but not a huge increase in revenue for a $6 billion company. The delivery of songs via of Akamai or other content delivery services isn’t cheap and the costs of development of the Windows version of iMS is also not an inexpensive matter.
If Apple were to ship 500,000 Windows iPods in response to the release of the Windows iMS (presuming 50% of those units are the $300 version and the remaining 50% are split between the more expensive models), Apple’s gross revenue would increase by more than $175 million but the gross margin on those iPod sales would exceed $50 million, adding $.04 per share to earnings on average per quarter for each of the four quarters following the release of the Windows iMS. I doubt Apple will clear $50 million (after costs are covered) even on $500 million of song downloads from the Windows version of iMS. I also don’t expect the Windows iMS to generate anywhere near $500 million in song download revenue. I see perhaps $200 million in the first year following release.
I don’t see the song download revenue as the biggest benefit to Apple. IMHO the benefit to Apple is the sale of iPods and perhaps other iMS related accessories.
Are people missing the point when it comes to the benefits of the iMS for Apple? What do you think?
