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 MSFTis action could also make partners think twice before deciding to work with MSFT on future projects. We view MSFTis 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 2000is. 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 MSFTis 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 partnersi
(Creative, iriver, Samsung, etc.) failures in gaining market share on
Apple.”
He expects Microsoft to succeed in chipping away at Appleis market, “but to what extent it is too early to
say. Also, given the changing focus on the Apple story from the iPodis
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. Wuis thoughts on Microsoftis 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 Appleis 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. Appleis share price leaped dramatically after its earnings call last Wednesday and has bounced between $60 and $62 since then.
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