Apple's Content Problem (AAPL)
One of the most interesting aspects of the Apple (AAPL) SEC filings is the reference made to content for the iPod and iTune products and services.
"The Company pays substantial fees to obtain the rights to offer to its customers this third-party digital content. The CompanyÂs licensing arrangements with these third-party content providers are short-term in nature and do not guarantee the future renewal of these arrangements at commercially reasonable terms, if at all."
This issue has been more visible recently as Apple negotiates with movie studios to procure video content for the iPod. However, it points to the issue that Apple has with the music companies. The success of iTune content sales could hurt its margins as the record companies look for a bigger piece of the action. From the latest Apple 10-Q: "Certain parties in the music industry have consolidated and formed alliances, which could limit the availability and increase the fees required to offer digital content to customers through the iTunes Music Store."
And, why wouldn't the companies that provide content to iTunes want a larger cut? None of them could have forecast the huge success of the iPod model, but now that the tremendous sales volume is obvious, suppliers like content owners will certainly press for a larger piece of the pie.
The risk to Apple's margins are significant. iPod sales in the last quarter hit 8.526 million units up from 5.311 million in the year ago period, a 61% increase. Revenue from iPod sales hit $1.714 billion, up 69%. The theory that Mac sales will become a second strong leg for Apple's growth are not supported by the numbers. Mac unit sales were 1.112 million up from 1.07 million in the first quarter a year ago. Total sales for Mac products were only up 5% while the company'stotala revenues were up 34% in Q1 06.
Apple is already facing intellectual property suits from companies like Creative Technology (CREAF) who want a part of the revenue that the company gets from iPod. As a matter of fact, Apple filings indicate that there are 24 legal actions involving the company. Granted, many of these have nothing to do with iPod, but successful, cash rich companies draw litigation and the number of suits involving the iPod and iTunes may well increase.
Apple's strength is becoming a weakness. Although content companies need the iPod as a distribution platform because of its tremendous success, they are bound to want a larger portion of the revenue from a level of success no one could have anticipated when the product was launched.
Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in any of the companies he writes about.
"The Company pays substantial fees to obtain the rights to offer to its customers this third-party digital content. The CompanyÂs licensing arrangements with these third-party content providers are short-term in nature and do not guarantee the future renewal of these arrangements at commercially reasonable terms, if at all."
This issue has been more visible recently as Apple negotiates with movie studios to procure video content for the iPod. However, it points to the issue that Apple has with the music companies. The success of iTune content sales could hurt its margins as the record companies look for a bigger piece of the action. From the latest Apple 10-Q: "Certain parties in the music industry have consolidated and formed alliances, which could limit the availability and increase the fees required to offer digital content to customers through the iTunes Music Store."
And, why wouldn't the companies that provide content to iTunes want a larger cut? None of them could have forecast the huge success of the iPod model, but now that the tremendous sales volume is obvious, suppliers like content owners will certainly press for a larger piece of the pie.
The risk to Apple's margins are significant. iPod sales in the last quarter hit 8.526 million units up from 5.311 million in the year ago period, a 61% increase. Revenue from iPod sales hit $1.714 billion, up 69%. The theory that Mac sales will become a second strong leg for Apple's growth are not supported by the numbers. Mac unit sales were 1.112 million up from 1.07 million in the first quarter a year ago. Total sales for Mac products were only up 5% while the company'stotala revenues were up 34% in Q1 06.
Apple is already facing intellectual property suits from companies like Creative Technology (CREAF) who want a part of the revenue that the company gets from iPod. As a matter of fact, Apple filings indicate that there are 24 legal actions involving the company. Granted, many of these have nothing to do with iPod, but successful, cash rich companies draw litigation and the number of suits involving the iPod and iTunes may well increase.
Apple's strength is becoming a weakness. Although content companies need the iPod as a distribution platform because of its tremendous success, they are bound to want a larger portion of the revenue from a level of success no one could have anticipated when the product was launched.
Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in any of the companies he writes about.
posted by douglas mcintyre at 7:25 AM
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