Merrill Lynch Comments on Headless Mac Rumors; Reiterates Buy

Following his comments on December 23rd to investors regarding the iPod, Steve Milunovich of Merrill Lynch commented on Monday about rumors that Apple will announce an inexpensive, headless Mac at next weekis Macworld Expo in San Francisco. In those comments, obtained by The Mac Observer, Mr. Milunovich does not say whether or not he thinks the rumors are true, but instead lays out the upside if they are. He also reiterated his "Buy" rating for Appleis stock, and the $78 target price the firm laid out in 2004.

"As we advocated in our June 22 report Apple Computer: New iMac Coming?," Mr. Milunovich wrote in the report, "we like the idea of a headless iMac. Why require a PC owner to buy a new monitor to get a Mac? Selling just the system unit would cut significantly the cost to switch."

Mr. Milunovich said that the potential market for such a Mac would be iPod users "wanting a second PC easy to use with their iPod." While the iPod works with Windows XP through Appleis own iTunes for Windows, Mr. Milunovich noted that many Windows users have to upgrade to version XP of Microsoftis operating system. His unstated implication is that some may dip their toes in the world of the Mac if it was inexpensive enough.

This is an idea known as the iPod Halo Effect, an idea that many analysts advocate.

The third point made in todayis advisory is that a headless Mac "could be the second step for Apple moving into the digital living room (the first was the AirPort Express)." Without going into detail, he argues that Apple is well-positioned in the minds of consumers to introduce an "entertainment server" for the living room.

Lastly, Mr. Milunovich said that "Apple needs to build a strong digital consumer franchise based on more than iPod but using iPod as the lever."

On Friday, Gene Munster of Piper Jaffray also commented on the same rumor, calling it "not out of the question." As we noted above, such a comment goes beyond what Mr. Milunovich was willing to venture, and his comments are completely devoid any pronouncement on whether or not he believes the rumors are correct.

Appleis policy is to never comment on unannounced products, though this particular rumor has gained far more attention than any that have made the normal channels in the past.

Mr. Milunovich is one of several analysts who have publicly commented on the headless Mac, and much attention has already been lavished on Apple in the weeks heading into this yearis Macworld Expo.

AAPL closed Monday at 63.29, off by 1.11 (-1.72%), on moderately strong volume of 12.3 million shares trading hands.