Merrill Lynch analyst Steven Milunovich issued a research note Monday reiterating his ‘Buy’ rating on Apple Computer (AAPL), saying Mac sales are “accelerating” and that the iPod maker would probably start a subscription music service like Yahoo’s within a year.
Having recently met with Apple management in Cupertino, Calif., Mr. Milunovich said Apple’s PC differentiation is increasing.
“The company can’t quantify the halo effect but says that something has accelerated Mac sales,” he wrote in a report to clients obtained by The Mac Observer. “Store surveys still show over 40% of Macs sold are to new Apple users.
The ‘halo effect’ has been synonymous with Apple for over a year now. In basic terms its definition is customers who buy an iPod, become hooked on Apple’s products and their ease of use, and then buy a Macintosh as their primary or secondary PC. Apple has done much to push the premise of such an effect, but has given little evidence to prove it, such as survey results or customer demographic data.
As for its online iTunes Music Store (iTMS) service, Mr. Milunovich reported Apple doesn’t expect to make much money from selling music.
“Although moderately profitable, the company doesn’t seem optimistic that songs will be a major profit contributor.,” he wrote. “We think the record labels get about US$0.65 per song with credit card fees taking close to $0.20.”
He said Apple isn’t against a subscription service, similar to one recently announced by Yahoo, but thinks most users want to own their music library.
“We think Apple could introduce a subscription service in the next year, which could be less profitable than selling songs initially though possibly more profitable long term if sub(cription) rates rise,” he wrote.
Mr. Milunovich said Apple execs continued to “downplay video, pointing out that movies take too long to down for now, are not watched over and over, and that unlike music there are many ways to acquire movies.”
Despite comments from Apple executives, Mr. Milunovich still believes an iPod with video capabilities could happen. Management told him they are “not optimistic that satellite radio would take off” that would make a combination iPod/satellite receiver a popular item.
“We maintain our ‘Buy’ and price objective of $51 per share.,” he wrote. “First, we believe the battery failure lawsuit has been reserved for and should not have a long-lasting effect. Second, reports of higher inventory are likely true with Apple supply caught up on almost all products and retailers preparing for back to school. The issue is sell-through, which is hard to track but appears solid.”
Mr. Milunovich did not mention or comment on reports that Apple will switch to the Intel processor for future Macintosh PCs, as has been reported in the last week.