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Apple wins raves for e-music solution Add to ...

Apple Computer Corp. has done it yet again, grabbing headlines with a new product set to revolutionize the industry. And in return, all the company got for its efforts was polite applause from Wall Street.

So why aren't analysts as excited by Apple's new on-line music service as Steve Jobs seems to be?

On Monday, the Apple head introduced iTunes Music Store, which was promptly hailed as a solution to the music industry's battle with piracy, free downloading and lost sales.

Even some recording artists have gone on the record as being "down with it." In a Fortune magazine spread, pop acts Sheryl Crow, Dr. Dre and Christina Aguilera all came out in support of Apple.

Like Apple's past innovations, the appeal is it's simplicity. For 99 cents (U.S.) each, and with no extra subscription fees, Mac users in the United States can download any in a selection 200,000 songs from the five major international music label conglomerates. For $9.99, they can download entire albums. Via a simple stand hook-up to a Mac computer, the service can link directly into the users' iPod personal stereos, tying the service into the company's whole strategy of creating a home-entertainment computer workstation with software including iTunes, iMovie, iPhoto and other "i"s.

To say the least, Apple's service provides a legal alternative to the acrimony between file-sharers and record companies. The Recording Industry Association of America, for instance, is trying to put the fear into upstart file-sharing services by suing four college students, claiming $150,000 in damages per song from the more than one million songs swapped for free over the students' Web services. Yet on Friday, Los Angeles court exonerated two other file-sharing services from damages.

At the same time, the record companies have tried and failed to create their own on-line music-buying services, by charging subscription dues, limiting how the music can be downloaded and in the end, turning off customers.

In other words, it's a right mess, which only Apple appears to have solved. So why then was Wall Street's reaction so muted? Wonderful concept, analysts said, but will it make money?

"Paying for downloaded music could prove to be a habit that takes time to form," Merrill Lynch analysts say in a report. "The successor to Napster, file-swapping sites like Kazaa, may not be easily beaten. It is not easy for consumers to pay for things they have previously gotten for free."

There's also the fear that another company could come right along and create a similar service, Merrill Lynch said. This would be particularly worrying if, as in all likelihood, an imitator comes along with a service that downloads on to IBM-compatible PCs (which make up 97 per cent of the personal computer market, compared with Apple's tiny 3 per cent).

Apple plans to introduce a PC version of its Music Store this year.

But Brett Miller, an analyst at A.G. Edwards & Sons, argues that even if the Music Store were to take hold, it still would likely not draw much revenue.

"It's a positive. It's a good thing. It's nice to see the industry moving. But what's the quantification of the revenue and earnings impact?" he said.

Analyst Richard Gardner at Smith Barney Citigroup breaks it down like this. If 300,000 users were to embrace it and download 25 to 50 songs a month per user -- say net profit to Apple was between 5 and 10 cents -- Music Store would still only add less than 1 cent to Apple's quarterly earnings per share.

Yet despite analysts' concern about the cold reality of profitability, they still praise Apple. "The service features the same elegance and ease of use that epitomize the rest of Apple's software offerings," Mr. Gardner added.

It's the lure that the Music Store brings to Apple's entire iLife line of applications (iTunes, iMovie, etc.), in a sense turning Apple into a newfangled Sony Corp., with home entertainment as a focus of its market and the raison d'etre for the music service.

For all his talk Monday about revolutionizing the record business, Mr. Jobs left company watchers with little on how the service would impact Apple's profit. The true benefit then for Apple could be that it makes it look yet again like a leader in innovation. Forget the profit for now.

Follow on Twitter: @Guy_Dixon

 

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