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?

Fact: the vast majority of computer users don’t “get” Apple or its business model.
Fact: the same goes for most journalists/analysts.

I say that whatever positive news can be generated by iMS is a Good Thing. Whether the pundits get it right is immaterial. The market, like water, will find its own level for the iMS and in the meantime any news that brings buyers into contact with Apple will in some way be good for those of us maintaining the faith.

DT, you’re right, many people are seeing the iMS through a less than complete perspective but, you wanna know something, I don’t care. Let ‘em get it wrong. When the shakedown comes we’ll see whose crystal ball had the best broadcast. Perhaps it won’t be yours or mine.
 
I noticed today that Sharman Networks Limited issued a press release to the effect that Kazaa Media Desktop now holds the record for the most downloaded software with 229,513,316 worldwide downloads.

How fortuitous for Sharman that this record should come just as the iMS is charming the media.

[quote author=“coaten”]
 
I noticed today that Sharman Networks Limited issued a press release to the effect that Kazaa Media Desktop now holds the record for the most downloaded software with 229,513,316 worldwide downloads.

How fortuitous for Sharman that this record should come just as the iMS is charming the media.

But Apple does not have these kinds of convoluted hassles .

I went to the company’s home page and was hit with two pop-up ads. Just one more reason the investors behind Sharman Networks wish to remain anonymous

Approaching the noon hour in New York on Tuesday, AAPL is trading up $.43 (more than 2% higher) at $18.75. Traders are apparently looking at Apple favorably following the Barron’s article.

[quote author=“coaten”]Fact: the vast majority of computer users don’t “get” Apple or its business model.
Fact: the same goes for most journalists/analysts.

This column in CNN/Money evidences your point (and mine)! :x

Yup. Clueless.

Yes, they are. An article I was reading tonight was talking about how Apple needs to start subscriptions to keep the iTMS a partially profitable source. They are comparing AppleMusic.com to Listen.com. It’s pathetic.

People just don’t get it…

I’d like to say it one more time to any journalists who might read this:

Selling music at $.99 per song or $.79 per song via of a $10.00 a month subscription service is not a money-making business. Apple’s goal is to sell iPods and at a future time other iMS-related accessories.

The music download model has not been profitable so far. I doubt there is a model under development that will support the sale of music at these prices and return either a profit on operations or an opportunity to recoup the investment in establishing the infrastructure and developing the service.

iPods are a profitable business. Selling music via of a download service at $.99 is not a profitable business. Selling music to create demand for iPods is a smart strategy and a profitable model.

Well said, Robert! 

It looks like this Wall Street analyst gets the point

Definitely appears so. 

Care to reconsider this quote?

The music download model has not been profitable so far. I doubt there is a model under development that will support the sale of music at these prices and return either a profit on operations or an opportunity to recoup the investment in establishing the infrastructure and developing the service.

Check out what Fred said today…

Also during Fred Anderson’s conference call, he noted that the iTMS almost broke even in the June quarter, its first quarter of operations, a somewhat remarkable feat. The company sold some 5 million songs during the roughly five weeks it was operational during the quarter, and has sold another 1.5 million songs so far during the July quarter.

alanward, welcome to the forums!

It is remarkable, considering the investment, that Apple almost broke even on the iTMS operation in the quarter. The real benefit, of course, is the additional sales of iPods.

If Apple can break even on the iTMS it means it has a service that can only attract more users to the Mac while helping the company to sell high-margin iPods. Not a bad deal.

alanward, welcome to the forums!

Thanks.

It is remarkable, considering the investment, that Apple almost broke even on the iTMS operation in the quarter. The real benefit, of course, is the additional sales of iPods. 
 
If Apple can break even on the iTMS it means it has a service that can only attract more users to the Mac while helping the company to sell high-margin iPods. Not a bad deal.

But when you consider the larger audience (after the windoze version of iTunes is out) it could also be a decent source of revenue on it’s own.