Retailers see strong Mac demand, little excitement over Zune

The checks were part UBS's monthly "Retail Rumblings" report, where analysts visit several retail stores in New York and New Jersey to focus on printer, PC/Mac and iPod activity, including on-site discussions with store managers, monthly price and inventory tracking and shelf space observations. The firm also checks company and retail websites, and conducts telephone interviews nationwide to supplement those findings.

On Apple, the Mac and the iPod

"Our checks for Apple continue to be positive for MacBooks, which could lend upside potential to our estimates for fiscal 1Q07 (ends December) and bodes well for continued share gains," analyst Ben Reitzes wrote in his report to clients, first distributed on Monday. "While Apple continues to dominate the MP3 player market in terms of share, our checks indicate that the MP3 market is a bit more subdued than last year due to general market maturation."

Still, Reitzes said he noticed some improvement in iPod nano demand as a result of the remastered aluminum models. He said initial sales of the company's second-generation iPod shuffle also appear to be solid. "While Microsoft’s Zune will hit stores tomorrow, our checks show little excitement around the new product and we are not expecting much of an impact to iPod sales from the new MP3 player," the analyst wrote. "In fact, initial reviews for the Zune have been far from impressive."

During his store visits this month, Reitzes said he noticed a small cardboard display at CompUSA and Office Depot featuring pictures and pamphlets about Zune. "The displays were not given prominent floor space and could not be seen when walking into the store," he said. "While we will be keeping a close eye on the impact of Zune, we do not see this product as much of a threat to Apple’s iPod given Apple’s loyal customer base, easy to use iTunes software and sleek, innovative form factors."

The analysts believes retailers are not expecting much in terms of initial demand for Zune, as is evident from their lack of promotional material around the player and their hidden displays. "We are not expecting Zune to have a meaningful impact on iPod sales," he said.

MacBook demand increasing

On the Mac front, Reitzes said demand for Apple's full notebook line is strong, with consumer interest rising not only for the company's 13-inch Core 2 Duo MacBooks, but also its 15- and 17-inch MacBook Pro models. "During our checks over the past few months, representatives at CompUSA, as well as at Apple stores, continue to see solid demand for the MacBooks, with checks this month again indicating that MacBook strength has continued beyond the peak back to school spending season, which ended in mid-September," he wrote.

The analyst noted that wait times for MacBooks recently increased to 1-3 business days from 24 hours on Apple's online store, after previously holding in the 5-7 business day range throughout the back to school season. "We continue to believe solid demand for Macs will continue into [fiscal 2007] with upgraded MacBooks and MacBook Pros both now featuring new Core 2 Duo processors, in time for the holiday season," he wrote.

Mac Pro may be the sleeper, iMacs to compel switchers

Meanwhile, Reitzes said checks with representatives from Apple's retail stores indicate that demand has been somewhat subdued for the company's new Mac Pro desktop, which was introduced in August. However, he continues to find the systems extremely compelling in terms of their power-for-price ratio.

"While we believe the new Mac Pros should help provide some support to desktop sales going forward (helping improve sales into high end 'prosumers'), we continue to believe the pickup in sales will be somewhat subdued until the release of Adobe’s next version of Creative Suite, which is currently scheduled to be released by Spring 2007," the analyst told clients.

"In addition, we believe new iMacs announced on September 6th should encourage switching from Windows to Mac and support estimates into calendar year-end. The new iMacs feature Intel Core 2 Duo processors including a new 24" model and a new entry price of $999 combined with increased processor speeds on Mac mini units (dual core performance at similar prices). Previous iMac products cost $1299 for the 17" model and $1699 for the 20" model."

Ultraportable Apple notebooks may further entice demand

Looking ahead to next year, Reitzes told clients that an Apple ultraportable device could further drive momentum towards the Mac platform. "As we have stated in previous reports, we believe Apple may be working on some kind of 'ultra- portable PC' or some devices that can bridge the gap between media playing, basic wireless computing needs and even some type of gaming," he wrote. "We would not be surprised to see new devices within the next year."

While the PC market is rather mature with expectations of 14 percent in 2007, Reitzes said the portable segment continues to show strong growth with 21 percent growth expected for 2006 and 28 percent expected in 2007. Furthermore, within portables, certain segments such as ultraportable PCs are likely to become a bigger piece of the market, he said, given reduced costs by PC OEMs and new market entrants such as Apple.

"We believe Apple could see much better growth and drive this category if it stripped down features, optimized the device for media playing and web surfing and used its engineering and scale to drive prices down toward the $500-$600 level," Reitzes explained. "At this price, one million units could equate to over $500 million in revenue and over $0.05 in earnings-per-share."

Leopard and Mac share growth

Touching on Apple's software segment, the analyst said he also shares some excitement about new features in Leopard that could include telephony, which could make Macs even an even more important tool in terms of communication.

Overall, Reitzes said an increased focus on Macs should drive solid near term results and lead to longer term PC market share gains, which he believes will provide significant top line benefits and earnings power for the Cupertino, Calif.-based company.

"Right now, based on the current Mac line-up we estimate that each point of PC market share equates to over $3 billion in incremental revenue for Apple considering Apple’s high [average selling prices] (ASPs) and high attach rates for software/peripherals etc. and estimate that the bottom line impact from each point of share would top $0.50 using incremental margin analysis," he wrote. "We assume about 2 million units equate to 1 point of worldwide share and Apple’s ASPs approximate $1,300. Also, we assume each 2 million Mac units for Apple generate about $1 billion in “attached" revenue in terms of software, peripherals and other services."

Due to the rate in which Apple is gaining share in the PC market, Reitzes said his Mac estimates could once again prove to be conservative. For the three-month period ending December, he is estimate yearly Mac unit growth of 44 percent (12 percent quarterly) to 1.8 million units. For the entire 2007 fiscal year, the analyst is forecasting Mac unit growth of 35 percent to 7.2 million units. In fiscal 2008, he sees Mac sales rising to 8.5 million units.

"Included in our estimates is our view that Mac sales will benefit near-term from the delay of Microsoft’s Vista and strong acceptance of new Intel Macs," Reitzes explained. "In [fiscal 2007] and beyond we expect new software from Apple (Leopard) and Adobe (CS3) should stimulate further growth in Mac sales."

"We are also optimistic about further increases in Mac distribution through Apple retail stores and expanded relationships with Best Buy and Circuit City," the analyst continued. "Apple recently announced that its current pilot with Best Buy is progressing well and that it has recently expanded its presence in Best Buy to 50 stores, up from just 7 last quarter. In addition to Best Buy, Apple is also piloting its products within Circuit City — about 10 stores at this time."