By Bill Alpert
THE IPOD SHOWS WHY Apple Computer is a great company. With elegant hardware and friendly software, Apple's portable player made a profitable business out of digital music - a trick that had eluded record labels and such erstwhile leaders as Sony, Microsoft, Real Networks, and Napster.
Some Apple bulls argue that the shares could go 50% higher, noting how Apple has held its turf against the "iPod killers" of Sony and the digital-music schemes of Microsoft. Little noticed by these iPod zealots, however, is a looming threat from overhead with a footprint as large as the continent: Wireless phone companies are teaming up with the music industry to make most mobile phones into music players.
In the last year, the iPod has become Apple's best-selling product, bringing in a third of revenues for the Cupertino, Calif., firm. The iPod "halo effect" has lit up interest in Apple's Macintosh computer and Apple's stock. Since iPod's debut, Apple shares have risen from under 7 bucks to a recent price of 39. That values the company at $32 billion, or about 43 times the last 12 months' earnings and three times sales.
Handset numbers overwhelm the iPod's. While optimists think Apple could sell 45 million iPods next year, mobile-phone makers will be selling more than 750 million handsets.
All those handsets could weigh on the iPod's growth prospects -- and Apple's premium stock valuation. Cellphone users won't need to lug around a second gadget to have their music. By next year, a standard feature in many new handsets will be the software, circuitry and data storage for portable music. Handsets will be able to "side-load" songs from a personal computer, like the iPod. But in addition, they will be able to download music over-the-air, using the fast transmission speeds of the third-generation wireless networks that cellular carriers are now deploying around the country. The cellular firms are upgrading to third-generation, or 3G, technology, in large part so they can sell their voice customers stuff like music.
The wireless companies will start launching their music services in the fall. They're not planning to match Apple's musical offering -- they want to marginalize it. Wireless technology will allow interactivity and immediacy beyond what's possible with a tethered product like the iPod. Convenience and impulsiveness pay: Cellphone subscribers willingly spend two bucks for a six-second pop-song ringtone, while spending only 99 cents for the full-track song at Apple's iTunes Music Store. Ringtones are already a multi-billion dollar business for cellular firms and for recording companies.
The record labels need the money. Compact-disc sales keep dropping. Artists like Li'l Flip and Petey Pablo sell more ringtones than CDs. Music companies like Sony-BMG and EMI have found the wireless carriers easier to work with than Apple, and more profitable than Wal-Mart. With the rollout of full-track music services in the next 12 months, the wireless phone could become the music industry's biggest and most profitable distribution channel.