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Wednesday, May 03, 2006, 02:00 pm PT (05:00 pm ET)

PortalPlayer chip still destined for new video iPod?

Despite the loss of Apple's iPod nano business, system-on-a-chip maker PortalPlayer remains the frontrunner to supply its chips for the company's upcoming video iPod revision, analysts for Wedbush Morgan Securities said this week.

"We continue to believe PortalPlayer will retain its socket in the soon-to-be-released Video iPod given Apple’s design schedule constraints," analyst Craig Berger told clients in a research note on Tuesday.

The analyst said Apple would face an "execution risk" should it change its video iPod SoC suppliers at this point in the music player's development cycle.

"With respect to any forthcoming Video iPod, we believe Broadcom’s video processing chip does not appear well suited to drive both the video processing and applications processing within the Video iPod," he wrote. "Also, a new operating system would have to be written and debugged very quickly."

According to Berger, PortalPlayer also believes that its current SoC will be used in other members of Apple's iPod family. "This is one of the uber-bear case scenarios that investors have feared and has a disastrous impact on PortalPlayer’s profitability in light of the fact that iPod nano chip shipments once comprised 70 percent of our 2007 revenue," the analyst wrote.

In the meantime, Berger said PortalPlayer’s current quarter guidance implies some continued softness in the iPod nano and Video devices, implying Apple’s shipments could decline by 15-20 percent during its June quarter.

"We believe that Apple’s iPod orders have slowed in recent weeks," the analyst told clients. "One result of slowing orders can clearly be seen in the NAND flash market as spot pricing returns to the low end of the contract pricing range, a sign of oversupply in the market."

Based on Apple’s reported sale of 8.5 million iPods during the company's first calendar quarter of 2006, Berger estimates that PortalPlayer shipped about 9 million units of its current SoC during the same time period. Of the 8.5 million players Apple shipped, he estimates that 1 - 1.5 million were iPod shuffles that pack an SoC from SigmaTel. However, PortalPlayer is believed to have "refilled" Apple and non-Apple retail channels with about as many chips, in addition to shipping 300,000 to 500,000 units to non-Apple customers.

Wedbush Morgan Securities is maintaining a Hold rating on shares of PortalPlayer with a 12-month price target of $10 a share.

Comments made by Samsung executives last week suggest the electronics company won the iPod nano business lost by PortalPlayer.