Research firm hints at possible Apple innovations

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In a research note released to clients on Tuesday, UBS Investment Research offered a preview of Apple\'s second quarter earnings while analyzing some potential innovations it expects from the company over the next two years.

For the recently ended fiscal quarter, UBS estimates that Apple will earn 23 cents per share on revenue growth of 67% year-over-year to $3.2B. However, the firm notes that these estimates are conservative, suggesting Apple will likely post slightly higher figures when it reports its 2Q05 earnings on April 13th.

\"Our checks indicate that perhaps the biggest issue during fiscal 2Q05 and into this month is sales of new PowerBooks are being adversely impacted by problematic trackpads,\" the firm said. \"Apple is remedying this issue with longer lead times, a \"quick fix\" on its website and increased service calls. However, we believe that upside in other segments more than make up for the PowerBook issues.\"

Analysts Ben Reitzes and Jeff Brickman said new products from Apple could bring more photo and video management features, which could expand iTunes software and the iPod form factor beyond origins in music. \"As evidenced by the iPod Photo, we believe iTunes can be expanded not only to manage digital photo libraries, but also video or movie downloads with even a video service emulating the iTunes Music Store,\" the analysts said. \"As a result, we believe an expanded and free iTunes download represents a \"Trojan Horse\" into Windows-based PC’s, expanding Apple’s appeal further and creating more switchers over time.\"

According to a series of recently performed checks, UBS said Apple\'s future product developments and innovations could possibly include: more innovation around photo-capable iPods; multimedia iPods; a digital media hub; and even an iTunes-like movie/video download service.

In the research note, the analysts detailed their expectations for each of these possible innovations in an attempt to address public speculation about what directions Apple may be headed.

iPod photo Features Could Become Standard

The analysts believe that iPod photo-like features will eventually become standard in hard disk-based iPods as color screen prices fall and battery technologies improve.

\"Apple continues to build-out its imaging ecosystem in a similar fashion as with what the company was able to accomplish with music,\" the analysts said. For example, they cite Apple\'s recently introduced $29 camera connector, which offers a cheaper alternative to purchasing additional memory in order to save pictures when on the go. The analysts said digital camera owners may begin to see the iPod photo as a compelling accessory that can expand the capacity of their camera, in addition to aiding in the creation of portable digital photo albums.

UBS predicts Apple will update or expand its iPod photo product line prior to the holiday shopping season, lowering price points and possibly introducing a photo-capable flash-based model.

Multimedia iPod Could Still Be Possible

Despite comments from Steve Jobs to the contrary, the firm said it wouldn’t be surprised if Apple eventually launched some form of a multimedia iPod. \"Reports suggest that Apple is likely watching the reception for the video features in Sony’s PSP very carefully,\" the analysts wrote in the report. \"We believe that real success for a video/movie capable iPod may need to come in conjunction with a new download service from Apple, that can easily put content into the device.\" They said such an Apple device would likely not surface until 2006, and if it did, it would need to retail for less than $500 and include a color screen akin to the PSP’s, at least 4-6 hours of battery life, and 60GB of storage.

Expect a Media Hub – a Gateway into the Digital Home

UBS also believes it\'s increasingly likely Apple will focus on becoming the center of the \"digital home,\" saying by the end of 2005 the company could introduce a media hub that acts as a server and storage unit for music, movies, photos and other types of home entertainment.

\"We believe Apple may be able to build upon its experience with iTunes to create a comparable service for motion content,\" the analysts wrote. \"With Steve Jobs connections in entertainment, we doubt he will sit back and let this opportunity slip into the hands of a competitor.\"

While UBS in its recent report was unable to offer specifications of such a product, the firm did say that its checks indicate Apple is currently looking into development of a digital hub product that could hit the market by the end of the year.

iTunes For Movies?

Saying it believes the movie industry is in a similar position to the music industry of five years ago, UBS thinks there is \"significant opportunity\" for Apple to become the \"thought leader\" again with an iTunes for movies download service that could debut by the end of 2006.

\"We believe that the iTunes model could work well with movies as download times improve,\" the analysts said. \"Also, Steve Jobs may be one of the few industry executives that may be able to pull off an agreement that would be palatable to both the movie and consumer electronics industry.\"

Cell Phone or Wireless iPods

Touching on the recent controversy surrounding the Apple-Motorola iTunes phone (or lack thereof), UBS said it believes the cell phone market represents an exciting opportunity for Apple in terms of driving additional songs through iTunes; adding that any imposed licensing fees for iTunes would be lucrative for Apple. However, the firm believes the company must continue to innovate with iPod capabilities in order to fend against an eventual boom of hard-drive equipped cell phones that will be capable of playing music files and possibly making the iPod seem obsolete.

\"We believe that it is more likely Apple is trying to figure out how to make a wireless iPod (perhaps using WiFi) to download music on the fly,\" the firm said. \"This type of wireless iPod device is likely still on the drafting table, but could become a reality by the end of next year in our view.\"

While offering no guarantees, UBS said Apple is in a strong position to capitalize on current trends. \"The dynamics in consumer entertainment seem to still be moving toward Apple and the company has an opportunity to expand its competitive advantage with its software,\" the firm said.

UBS believes Apple\'s software must play a key roll in moving forward, and estimates that each point of PC market share gained by the company will equate to about $2 billion in incremental Macintosh revenue. \"The bottom line impact from each point of share would top $0.30 per share using incremental margin analysis,\" the firm said.

UBS maintained its \"Buy\" rating on Apple with a price objective of $50 a share.


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