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Tuesday, June 20, 2006, 12:00 pm PT (03:00 pm ET)

Apple can withstand Microsoft iPod assault - analyst

Microsoft's rumored foray into the digital music business is likely to have the strongest impact on partners like Creative and Sony rather than Apple Computer and its iPod, says one analyst.

American Technology Research analyst Shaw Wu on Tuesday said the biggest issue with Microsoft entering the portable music scene is that it will pit itself against its current partners.

On Friday, Reuters cited unnamed sources in saying the Redmond, Wash.-based software maker is laying the groundwork to compete against Apple's iPod digital entertainment device and iTunes service.

"No matter what Microsoft says, this move essentially puts Microsoft in direct competition with its partners that it has worked with over the past 3 to 4 years including Creative, Sony, Samsung, Archos, Toshiba, iRiver, Philips, MTV Networks, and countless others," Wu told clients in a research note.

The analyst also questions whether Microsoft can be profitable and successful in making portable hardware. "Apple has proven the portable entertainment space is a highly competitive business where it earns the bulk of its profits with NAND flash, microdrives, and content providers also profiting," he said. "However, outside of [Apple and those suppliers], profits have been meager to non-existent."

Wu says Microsoft's biggest successes have come from pursuing its horizontal technologies like Windows, Office and SQL Server, while its vertical technologies like the Xbox have proven to be less successful money losers.

"The question is whether Microsoft is willing to fund another potential highly unprofitable business," the analyst said.

Furthermore, Wu believes the advantages of Apple's iPod+iTunes franchise are largely defendable should they come under attack from Microsoft or any other company. He pointed out that few (if any) other companies have been able to successfully execute a vertical strategy like Apple's, where the company maintains total control of the hardware, software and service.

Wu also notes that Apple retains a large install base of about 50 million iPods and 300 million iTunes users, both of which are still growing with each day. But the analyst believes iPods are just part of a broad Apple strategy, meaning Microsoft would have to enter other hardware segments, such as PCs, cell phones and home entertainment servers, if it wanted to keep up.

Wu maintains a Buy rating on Apple shares with a price target of $101.