No "Cold Christmas" For Apple

Sep.11.07 | About: Apple Inc. (AAPL)

By Carl Howe

Some key developments for Apple (NASDAQ:AAPL) watchers:

Apple's secret holiday weapon: the iPod Touch

Based upon last week's iPhone price cut and some analyst opinions stating we won't see a 3G iPhone this year, Scott Moritz at yesterday predicted a "Cold Christmas" for Apple.

Boy, has he ever gotten it wrong.

First, he argues that the iPhone price cut validates a rumor that Apple was cutting iPhone production in half. Yeah right. Economics 101 says that when you lower prices, demand increases. So Apple would cut production why? Heck, my son even bought a refurbished iPhone over the weekend with his own money, so I'd argue that Steve Jobs' goal of bringing more customers to the iPhone for the holidays is all but assured.

But in my opinion, the real reason Moritz has it so wrong is that he ignores Santa's secret weapon that will put Apple's holiday results over the top. That secret weapon is iPod touch. And our analysis says that is going to be huger than huge.

Why do I think that the iPod touch will be such a hit? Because the iPod Touch

  • Already is selling well: The iPod touch is currently the most popular music player on Amazon's list and the #2 top seller in all of Amazon Electronics -- and it isn't shipping yet.
  • Instantly offers world-wide appeal: Unlike the iPhone, which requires six month carrier certification and blessing in each country in which it will be offered, the iPod touch is a garden-variety piece of consumer electronics. That means that so long as it doesn't spontaneously burst into flame and complies with all necessary packaging and safety guidelines, it can be sold in almost every country in the world within weeks of it being offered in the US.
  • Can be sold through distribution: Because of its exclusivity carrier relationship, only Apple and AT&T can sell the iPhone in the US, and no one can yet sell the iPhone internationally. But the iPod touch has no such restrictions. iPod touches will be available at Amazon, Target, Best Buy and countless other stores in the US. You'll also be able to buy them in other countries in such varied venues as Dixon's in London, FNAC in Paris, and 7-11 stores throughout Japan.
  • Isn't locked to another company's fortunes: A lot of consumers won't buy an iPhone because they already have a phone with Verizon or Sprint. Or, they may simply know and like their current phone. Or they don't like converged devices. The iPod touch appeals to all these consumer segments that the iPhone doesn't address -- and that makes its available market considerably larger.
  • So what's our projection for Apple's holiday season? I'll be publishing a detailed analysis in the September Analyzing Apple report (some previous reports are here), but I expect Apple to significantly exceed last year's 21 million iPods sold, and I also expect the average iPod selling price to rise.

    There is one open question looming over the iPod touch though, and that's how Apple will recognize the revenue from its sales. Apple amortizes both iPhone and Apple TV revenue over 24 months because of undelivered upgrades to those products, yet normally recognizes iPod sales immediately. Technology-wise, the iPod touch is just like an iPhone and will presumably benefit from many of the same upgrades that happen to the iPhone. And yet, it is an iPod and has no carrier revenue affiliated with it, and therefore, Apple can legitimately recognize the revenue from it immediately, just as it does with other iPods. We probably won't know the answer to this question until the October earnings report, but it will have a significant impact on the holiday forecast.

    But regardless of which way the answer turns out, I'm sure is going to have trouble explaining their forecast of a cold Christmas for Apple come January. They could just blame the miss on global warming. But more likely, it will just be the heat of holiday iPod touch sales.

    One million iPhones sold, expect millions more for the holidays

    Apple has a little piece on its hotnews page noting that it sold its millionth iPhone on Sunday. So much for the rumor that sales were soft, as promulgated by the aforementioned story predicting a "Cold Christmas" for Apple. If we exclude the first weekend from those numbers, the steady state of iPhone sales is about 10,000 a day, or 300,000 a month. Expect that number to ramp up to double that for the next three months based upon the holiday selling season and the new lower price. That means about 3 million iPhones sold by the end of the year, which any way you look at it, is a pretty impressive debut in Apple's new line of business.

    Coming soon to an iTunes store near you: movie rentals

    David Watanabe notes that the latest iTunes store has the ability to select problems with movie rentals in its reporting mechanism. We had predicted that movie rentals would arrive this fall back in June. I'm expecting to see the announcement in October, but it could happen as soon as later this month.