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September 06, 2007

New iPods Overshadowed By iPhone Price Cut

As the Apple iPod event was going on yesterday, I posted this comment on RealMoney.com:

"New colors for the Shuffle, a redesigned Nano focused on an improved video experience, higher capacity classic iPods topping out at 160GB, and iPod Touch - it seems like an iPhone without the phone. Seems like a very good lineup for the holiday season to me. Something for everyone. After last year's 21 million unit holiday iPod blowout a fully refreshed and upgraded lineup was necessary to maintain growth in iPods. Regardless of where the stock goes in the very near-term, I think this new iPod lineup is as good as anyone could have hoped. With Mac sales booming, fresh iPods, reasonable iPhone sales, and the new operating system coming, I think the Apple earnings story is shaping up very well. I remain a bull on AAPL."

The stock sold off sharply once the event concluded keying off the $200 price cut on the 8GB iPhone. Investors interpreted this as a sign that demand was dropping off quickly. I probably can’t argue with those who want to interpret it as a negative datapoint as far as demand goes. However, the only two major complaints about the iPhone since its introduction have been the price and the AT&T network. Morgan Stanley wrote yesterday that they have seen studies that a price cut of this magnitude could stimulate demand by as much as 30%....

....With holiday season coming, the iPhone at $599 would have been out of line with the new high capacity iPod Classic and iPod Touch (an iPhone without the phone). I think the Touch is going to be a home run product and easily outsell the iPhone. It seems logical that Apple promised AT&T the price cut if they could offer the Touch this holiday season. Additionally, somewhat lost in the commotion was that Apple will be selling ringtones for the iPhone and songs via wifi over the iPhone. AT&T won’t be sharing at all in that revenue so cutting prices to stimulate demand which in turn drives sales of revenue that belongs 100% to Apple was probably a key part of the decision-making process. Also, since we don’t know how the revenue share works with AT&T on iPhone sales and subscriptions, the financial impact of a price cut, particularly if it stimulates demand, is hard to gauge, even more so with the deferred revenue accounting. Finally, Jobs reiterated yesterday that the iPhone will launch in Europe in the fourth quarter. Maybe that price cut is part of the deal to get it done. Or maybe the price cut is a prelude to a $499 or $599 iPhone 3G? The point is that the initial reaction to the price cut might have been one-sided.

I stand by my bullish outlook built primarily on Macs, secondarily on iPods, and boosted by iPhone and upcoming Leopard sales. No one is disputing the strength of Macs this back-to-school season. The new iPod lineup hits all price points and offers functionality for everyone. The iPhone is now better positioned as a holiday item (mobile phones have been popular Christmas presents for years). With the product lineup and pricing clear, the risk to demand for Apple products over the critical next fourth months has moderated. I was mostly recently a buyer of Apple at $123 and then $114 for clients whose position sizes were too small or newer clients who did not own yet own Apple. Yesterday's news makes me comfortable paying a higher price next time I need to add to adjust client positions.

Posted by Steve Birenberg at September 6, 2007 10:35 AM in AAPL