Leaving aside the debate concerning why Apple Computer (AAPL) shares have been acting so poorly and whether it is deserved, I think it is fair to say that the Forrester report that said iTunes sales were plummeting was the start of the severe downward pressure. As you might recall, the Forrester report generated a huge amount of publicity and critics noted it was flawed and completely inaccurate.
Last week, the Wall Street Journal had an article discussing the report. It turns out that what Forrester measured was iTunes download activity comparing January 2006 to June 2006. This is a far different methodology than would be used on Wall Street, which deciphers growth trends by looking at year-over trends.
In this case, Wall Street’s approach is correct as the Forrester methodology fails to address significant seasonality in digital music sales. January is a high point, especially for iTunes, because of the popularity of iPods and other MP3 players as holiday gifts. iTunes seasonality was probably greater than usual last January as the blowout iPod sales of 14 million units in 4Q05 arguably represented the peak of iPod mania. Add in the iTunes gift cards received in December 2005 and is it any real surprise that June 2006 iTunes sales were below January 2006?….

The headlines on the Forrester report would have been much more effective if they noted that in 2006, June iTunes sales were off 65% from January while in 2005, the comparable decline was just 39%. This data still fails to note that year-over-year growth in iTunes remained strong and that December 2006 might surely represented the peak of iPod growth acceleration, but at least it would lead investors to ask the right questions about a possible slowing in the growth rate of iTunes sales.
And that is the real issue. Sales at iTunes are not keeping up with the growth of the installed base of iPods. That means that either new iPod buyers are purchasing fewer music tracks and videos from iTunes or early adopters are slowing their rate of purchases.
This strikes me as more of an issue for the content companies as digital downloads are supposed to take over and provide a revenue stream to replace lost physical sales. But for Apple, it could be an issue if it indicates that consumers are seeing less utility in their iPods. That might slow the sales of iPods and also could be a sign that Apple’s strategy to build an operating system around delivery and manipulation of digital content might have less traction than expected.
I don’t believe that and see Apple’s operating system and integrated digital content applications as the company’s key competitive advantage that will drive better than expected market share gains for Macs, and, in turn, the stock price.
Some folks might take the other side of that bet. But one bet we would all agree on is that Forrester would have done a much greater service to followers of Apple, the music companies, and digital content in general, had they better framed their conclusions rather than look for lots of free press by drawing in accurate conclusions from a flawed analysis.