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Wednesday, April 02, 2008, 07:00 am PT (10:00 am ET)

Report: sub-$200 WiFi touchscreen iPods from Apple by holidays

Investment bank Piper Jaffray said Wednesday it disagrees with the consensus on Wall Street that growth in Apple Inc.'s iPod business will screech to a halt this year, saying new products like a sub-$200 wireless touchscreen model will allow the company to grow the segment at moderate levels for the foreseeable future.

The firm's view was outlined by analyst Gene Munster in a third and final segment of his research report series on the Cupertino-based firm's "3 Cylinder Engine," in which he presented his views on the future of the iPod, its growth trajectory, upcoming models, and the latest on the Apple ecosystem.

"While we do not see the iPod business as a significant growth catalyst, we believe Apple remains positioned to slightly exceed Street estimates in 2008. Specifically, we believe the Street expects iPod unit growth to be about 53 million in 2008, essentially flat year-over-year. We disagree," he told clients. "We believe Apple can maintain iPod unit growth and slightly exceed Street expectations for the full year."

While Munster admits that it's unlikely the iPod will ever return to a high growth business of 20 percent and above, he sees growth levels of approximately 10 percent as obtainable on a yearly basis even given the possibility of an off quarter where units will reflect slightly negative growth.

The analyst advised clients that historical patterns suggest iPod growth has been stimulated by a combination of innovative new features and price reductions. To this end, he sees the upcoming release of the iPhone software developers kit (SDK) and App Store addressing the former, paving the way for dozens of new games, utilities, and productivity tools for iPod touch users.

"We note that this rapid increase in available features on the iPod touch is not speculation; Apple has indicated that the new iPod touch (and iPhone) operating system will be out by late June," he said. "Secondly, we expect Apple to release new Wi-Fi enabled, touchscreen iPods in the sub-$200 range by September. In fact, we believe the concept of the iPod will change in the next 12-18 months from a standalone music player to a mobile Internet device that fits in your pocket."

At the same time, Munster also believes Apple will continue innovate and progress in the areas of standalone music players, but sees iPod functionality as becoming significantly more diversified across price points, with the addition of the aforementioned Wi-Fi enabled models that will likely feature multi-touch technology.

"Admittedly, the exact way the product lineup will fit together remains unclear," he said, noting the difficult task facing the company in differentiating the iPod family from the iPhone family as iPod prices fall and the players increasingly gain features previously only available on the iPhone.

"With a sub-$200 Wi-Fi enabled iPod, the price-to-value equation changes in relation to the iPhone; however, we also expect Apple to release a sub-$300 iPhone in the coming months," he added.

Another challenge on Apple's part will designing these next-generation of internet ready, low cost iPods without applying too much pressure to its gross margins, which would lead to less profit on each model sold. For example, he cited a recent iSuppli report which pegs the price of the iPod touch's Wi-Fi module and touchscreen panel at a combined $45.

"For a $149 or $199 iPod, these costs apply margin pressure that will force Apple to innovate around the idea of an Internet connected iPod, which requires a larger screen than current iPod nanos, and an improved user input interface (like multi-touch technology)," he said. "We believe Apple is developing such solutions that will enable the company to deliver lower cost, Wi-Fi connected iPods in the near future. In turn, this new iPod platform should generate continued growth for the iPod segment of Apple's business."

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In the short term, Munster points to the recent price cuts on the iPod shuffle as the catalyst that will allow the company to post above consensus March quarter iPod results. While the Street and an extrapolation of NPD market data trend towards flat to slightly declining unit growth, he believes units will actually see a modest boost due to the shuffle price decrease, driving 15 percent year-over-year growth on iPod shuffle ASPs of $67, overall iPod ASPs of $172, and iPod segment revenue of $1.94 billion.

"We are increasingly confident in our estimate of 11.3 million iPods in the March quarter," the analyst wrote.