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Analyst: Zune 'Akin to a Civil War'

TMO Reports - Analyst: Zune 'Akin to a Civil War'

by , 1:15 PM EDT, July 24th, 2006

Financial analysts Shaw Wu (American Technology Research) and Gene Munster (Piper Jaffray) on Monday issued research reports in response to Microsoft's Friday confirmation of its upcoming Zune MP3 player. The former said: "The key issue is Microsoft is competing with its partners, akin to a civil war."

Mr. Wu continued: "While the focus is on AAPL, we believe this move will likely have a much larger competitive impact on CREAF, SNDK, Sony, Samsung, iRiver, Archos, and others. We believe MSFT's action could also make partners think twice before deciding to work with MSFT on future projects. We view MSFT's entrance into portable media hardware akin to a civil war, much like if it entered the PC hardware market to compete with partners DELL, HPQ, and Lenovo."

In addition, the analyst said that "making [Zune and its accompanying music download store] easy-to-use and pleasant is easier said than done. In our opinion, Sony has come the closest in creating a pleasant experience with its Walkman cell phones, but its success has had little to no impact on AAPL (likely because customers use the Walkman phones mostly as cell phones)."

He also pointed out: "We believe iPod = Walkman for the 2000's. We believe AAPL has three other critical competitive advantages: (1) a strong iPod ecosystem of third-party accessories including car kits, docks/adapters, software applications, cases, speakers, etc. and (2) a large installed base of about 58 million iPods and 300 mm iTunes users; and (3) AAPL has sold over 1 billion songs and 30 million videos."

Finally, Mr. Wu said, "while most view the Xbox-Xbox 360 effort as a success, we believe it has been a failure financially costing MSFT and shareholders billions in losses with profitability likely a few years away, if at all. We believe MSFT's effort in portable media will likely result in similar economics."

The Piper Jaffray Perspective

In contrast, Mr. Munster was more pragmatic, noting that Zune could also be positioned as a portable gaming device and stating: "We believe the Zune initiative is a sign that Microsoft believes in the importance of the portable music market and has become uncomfortable with its partners' (Creative, iriver, Samsung, etc.) failures in gaining market share on Apple."

He expects Microsoft to succeed in chipping away at Apple's market, "but to what extent it is too early to say. Also, given the changing focus on the Apple story from the iPod's dominance to Mac market share gains, it is hard to say how the Street would react even if Microsoft were to chip away at iPod market share."

However, the analyst did agree with Mr. Wu's thoughts on Microsoft's prognosis in its battle against the iPod. "We do not believe, however, that the yet-to-be-seen Microsoft offering will be a worthy opponent for the iPod," Mr. Munster wrote. "One significant indication is that Windows Media-enabled MP3 players have been in the market for three years and have been unable to grow their roughly 25% market share. Additionally, we expect Apple will release new/upgraded iPods this fall that will likely push the envelope in innovation and ease-of-use."

Both analysts maintained their "Buy" and "Outperform" ratings, respectively, on Apple's stock. Mr. Wu has a US$75 price target on the shares, while Mr. Munster has a $99 target. At 1:15 PM EST on Monday, the stock was selling for $60.84, up 0.2% for the day. Apple's share price leaped dramatically after its earnings call last Wednesday and has bounced between $60 and $62 since then.

If you are interested in Apple's stock, join our forum members in the Apple Finance Boards, a moderated forum for Apple Investors and people who are interested in Apple's financial dealings. For other stories regarding Apple's stock activity, visit our updated Apple Stock Watch Special Report.

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