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Tuesday, September 05, 2006

More Flies On Apple’s iTunes


It is becoming difficult to find a company that is not going to compete with the iPod and iTunes. Creative Technology has a product and Apple has agreed to pay the Singapore-based company $100 million to settle an intellectual property dispute. Sandisk, which has about 9% of the MP3 market in the US, is launching a new player with more storage and an attractive price. The company is No. 2 to Apple in market share. Microsoft is about to launch Zune, its multimedia player, along with a music download services. Zune has some nifty features like WiFi.

Several companies, including RealNetworks, have online music down load stores that compete with iTunes.

The biggest threat to the near-monopoly that Apple has is the recently announced plan by News Corp that its MySpace web community will begin to allow its registered users to download music. The Wall Street Journal says that the price point will probably be $.79 a song. MySpace has entered a partnership with Snocap, which has a music-download back end system, to manage the playlists and payments. MySpace is one of the most visited sites on the internet, and, based on HitWise data, it now has a larger audience that any other web domain in the world. Reuters reports that MySpace will sell songs from three million independent bands through the new venture.

Apple’s competition for iPod and iTunes is now mounting by the month. A year ago, the threats to the Apple music ecosystem were limited. That has changed, and is probably not reflected in the stock, which trades just below $70, not far from its 52-week high of $86.40. Even with options dating issues, the stock has held its own over the last few weeks.

Apple may maintain a good deal of its share for both its iPod hardware and iTune software, but the price of that share is becoming more dear. Microsoft has said that it is prepared to spend hundreds of millions of dollars on its Zune initiative. Sandisk may be have the capital to be a huge competitor, but improved product could increase its presence in the No. 2 spot. MySpace, which claims to have nearly 100 million registered users and already has hundreds of thousand of bands posting information and music at the site, may be in a better position to launch a competitor to iTune than Microsoft. MySpace users tend to be in their late teens or twenties, a demographic sweet spot for selling music downloads.

Apple’s operating margins are running 13% or 14%. In the quarter ending April 1, on revenue of $4.359 billion, Apple has operating income of $529 million. Maintaining that kind of yield will be much harder with Microsoft and MySpace in the game.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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