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Monday, January 03, 2005, 11:00 am PT (02:00 pm ET)

Merrill Lynch: headless iMac hints at migration to \'digital living room\'

In a research note to clients this week, Merrill Lynch analyst Steve Milunovich offered his endorsement of the recently rumored sub-$500 iMac sans monitor.

Citing the cost of a 17" LCD now near $400 and the basic eMac at $799, he says Apple could sell a headless iMac for under $500 without hurting its profit margins.

"Why require a PC owner to buy a new monitor to get a Mac?," says Milunovich. "Selling just the system unit would cut significantly the cost to switch."

Noting that Windows users must upgrade to Windows XP to connect to an iPod, Milunovich said he believes the target audience to be iPod purchasers wanting a second PC to easily connect with their iPod.

And while the analyst agrees that the proposed iMac could cannibalize the eMac, he says the impact should be modest at best, as eMacs are primarily targeted at the education market.

Milunovich said he also believes that a headless iMac could mark the second step in Apple's migration towards the digital living room, citing the company's AirPort Express product as the first.

"Apple needs to build a strong digital consumer franchise based on more than iPod but using iPod as the lever," he says.

Merrill Lynch maintained its 'Buy' rating on Apple Computer with a price objective of $78 per share based on a 2.2X EV/Sales ratio, which is an 18% premium over Dell and Lexmark.

"Apple's earnings growth should be faster than Dell's," the firm says.