Apple's last big Hurrah

Apple has been very impressive. Actually, to be precise - Apple's iPOD has been impressive. The rest of the company is still just ok. Which is why I am so concerned about the dependence on the iPOD.

Steve Jobs announced that they topped 14M iPods this last quarter. Which is consistent with what I predicted in December (http://liverocket.blogspot.com/2005/12/reading-tea-leaves-and-cerner.html ). Hell, they topped my highest expectations of 12M units.

So why am I raining on the parade? Because the end of Apple's iPOD dominance has already begun.
First, it will begin with iTunes.
* Apple becomes Microsoft: Fighting against Open Source
Using an iPOD and downloading from iTunes means that the files are stored in an Apple proprietary software. That song/movie/TV show can not play on a non-iTunes device. Which will raise interesting ownership problems for users who want to play a song they legally purchased on a SanDisk device.
The opposite is true as well - only files downloaded using Apple's DRM coding can play on an iTunes ready device. This is what I mean. You download a song from Google. It will not play on your iPod. Maybe you can convert it to iTunes software, but not easily. Google/Yahoo can license iTunes software and code the song for you, but they won't want to pay a royalty.
Apple will fight Open Source kicking and screaming. Jobs will prove how remarkably Bill Gates-like he really is when it comes to trying to keep a virtual monopoly. This will sour both users and producers. Eventually, the industry will elect to use a Digital Rights Management system that is open sourced and non-Apple monopolized.
* Revenue
Apple earns $0.08 per download. Today that's ~$80M in annual revenue. Next year that could be $150M. But these files are a commodity, and Google/Yahoo don't see revenue they see attracting users. They'll give it away. How easy it will be to download songs/movies at a cheaper price off Google and convert to the software of your choice.

At the same time that iTunes loses its grip, the mobile audio/video device will get commoditized.
* Little value add. The clicker is a little easier. The software is a little easier. Come on - admit it. It feels cooler to own an iPod not the Dell knock off. But is that enough to overcharge? SanDisk offers a comparable iPod Nano - it's priced25% higher but with 50% more storage: 6GB storage vs 4GB. In 12 months it will be 10GB. That's about as much music as anyone can really store. Apple will lose leadership in the iPOD Nano market within 10 months and be shoved out in 18 months.
And if you peek at the breakdown of iPOD sales growth - this is where most of the growth has been
* Consumer Products Favor the Follower not The Leader - The Leader has to work out the bugs of discovering what the consumer wants, how to deliver and price it. The Follower just has to price it cheaper. Apple knows this - this is how they lost when they went against Microsoft Windows. And the mobile video/audio gadget will commoditize just like any other consumer device.

At every step of the way, Apple is in a race to sell more products to compensate for what will be accelerating price pressure.
(An example of this is the Mazda Miata. When it first appeared, they sold for a premium. After 2 or 3 years, however, the prices collapsed as the hipness wore off and people lost interest in paying the I AM COOL TAX.)
Apple is rushing to lock in iPOD as the standard. Cars are appearing with iPOD ready connectors. Those are proprietary, by the way. Royalties must be paid to Apple - steep royalties by the standards of high tech.

What about the other revenue streams? Forget the MACs and iBooks - those barely show profits. It is all about the iPod and that is soon to commoditize.
Maybe some to-be-announced revenue stream?

Apple must continue to more than double iPOD sales to maintain the valuation. That's 30M iPODs next holiday season or about 70M units over the next year. Sorry - I'm laughing now. They are losing the Flash memory based iPOD market to Sandisk while selling an additional 80M Video iPODs? Market saturation starts to occur this time next year and iPOD sales will soften.

I predict flattening sales $ and flattening earnings in the April quarter. At which point, as if awakening from a hangover, the stock will fall hard. Sony lost the Walkman market, Apple wil llose the iPOD market.

The have a grand master plan of building a vertically integrated media empire. Sadly, that plan didn't include the existence of massively wealthy competitors with the same plan: Google & Yahoo. And those companies are not device limited.