Apple’s New Pie, Old Recipe

Apple Inc. (AAPL) refreshed its iPod line, introducing new features to the iPod Touch, iPod Nano and iPod Shuffle at its event held in San Francisco yesterday.

Apple also introduced iTunes 10 with Ping (quite unexpectedly), a social networking feature that enables users to follow, comment and recommend songs and albums. Most importantly, Apple launched a new version of Apple TV.

The new Apple TV will be available next month. The iPod products will be available next week.

Here are some of the highlights:

Apple TV

Apple unveiled a new redesigned Apple TV set-top box for just $99 (original price $299 and currently available for $229) that will stream rented HD movies and television shows. The Apple TV is 75% smaller than its previous version and has a built-in HDMI2 cable connection (HDMI cable sold separately), optical audio, Wi-Fi, Ethernet and an internal power supply. It also has an A4 chip processor. The new Apple TV can easily transfer music, photos and videos from PCs and Macs to HD TV.

Disney’s (DIS) ABC, NewsCorp’s (NWSA) Fox and BBC America networks will be streaming TV shows and other programs for just 99 cents in rentals from the Apple TV. This could help Apple compete against established streaming video service providers like Hulu, Comcast Corp. (CMCSA), Time Warner Cable Inc. (TWC) and Cablevision System Corp. (CVC). Most episodes currently sell on iTunes for $1.99 or $2.99. Therefore the 99-cent television rentals would hurt show downloads that are priced higher. Moreover, Apple, due to its low rentals, could benefit from lower DVD viewership.

Apple TV will also streamline content from Netflix Inc. (NFLX) for just $8.99 a month. NetFlix has a library of 17,000 movies and television titles. First-run movies will be available for $4.99 (HD) and $3.99 (SD), while library movies will be available for $3.99 and $2.99, respectively. Apple TV will also streamline content from iPhones, iPads and iPod Touch, but whether all the content can be viewed remains uncertain.

This is a huge step in the entertainment industry, and we expect the new Apple TV to be successful, partly attributable to its lower price and the software that allows users to stream content from their iPhones and iPods to their TVs through the set-top box.

However, other major media providers such as General Electric Co.’s (GE) NBC Universal, Time Warner and CBS Corp. (CBS) and HBO were not on Apple’s agreement list. Apple’s lack of contracts from more content providers points out the challenges the company could face in the TV market.

To compete against Apple, Amazon.com Inc. (AMZN) cut the price on some downloaded TV shows to 99 cents from $2.99. Amazon will offer more than 260 shows from Walt Disney Co.’s ABC, News Corp.’s Fox and the BBC. Apple’s 99 cents in rentals puts up fierce competition; however, we remain skeptical about whether users would actually shell out money to rent TV shows in addition to their cable bill.

Competition for the Apple TV is stiff as it competes against Google (GOOG) TV, Samsung, Microsoft Corp. (MSFT) and Sony Corp. (SNE). Privately held Roku lowered its most expensive HD device that includes services from Netflix and Amazon to $99 recently. The Boxee Box, which is to be released in November, features a wide range of content and is priced at $199, according to sources. Logitech International (LOGI) is expected to come out with a set-top box this fall based on the Google TV platform, adding to the competition.

We remain highly positive on the lower price point, which should be a significant source of revenues and profits going forward. The 57% price cut will no doubt attract a large number of customers, in our view, despite intense competition. Over the longer term, we believe Apple TV has tremendous potential, given that with connected TVs gaining traction, software will be a key driver of sales.

We believe Apple could have done better, picking up features from its iPad. However, some of this development could be in the works. With Google TV and other products around the corner, this could be a good time to take a look at competitors’ actions and also gauge customer reaction.

iPods

Apple introduced the new iPod Touch (thinner and lighter than its previous model), with features such as FaceTime video chats over Wi-Fi networks, multitasking, retina display, HD video recording, A4 chip, 3-axis gyro, iOS 4.1, a longer battery life and with the facility of playing games with advanced graphics.

The device comes with digital front- and rear-facing cameras and includes the iMovie App. Customers can access iTunes Ping (a social networking feature that allows users to comment and recommend songs) directly from their new iPod touch. The new iPod touch is priced at $229 for the 8GB model, $299 for the 32GB model and $399 for the 64GB model.

Apple added a multi-touch interface for easy navigation and touch screen control and a new built-in clip to its iPod Nano. The click-wheel feature has been done away with and some new features have been added, such as the ability to create and edit play lists, and a built-in FM radio, which has live pause and up to 24 hours of music playback on a single battery charge. The new Nano is priced at $149 for the 8GB model and $179 for the 16GB model.

Apple announced a new redesigned iPod shuffle which features both clickable “ring” buttons and Apple’s VoiceOver technology for easy navigation. With nearly 50% increased battery life, the new iPod shuffle features over 15 hours of music playback on a single battery charge and offers 2GB of storage for just $49. Moreover the iPod classic will be available for $249 for the 160GB model.

Although Apple’s iPod constitutes a very small portion of its revenues, it remains immensely popular. Apple has sold 275 million iPods since its launch in 2001. Despite the new redesigned iPods, we believe unit shipments could be hurt due to the cannibalization from iPad and iPhones.

iTunes 10

Apple introduced iTunes 10 with Ping to 160 million iTunes users in 23 countries. iTunes 10 features HD TV show rentals for 99 cents an episode and includes AirPlay wireless music playback, a new version of AirTunes, which in addition to music can stream videos and photos to other Wi-Fi equipped devices. HD TV show rentals will require iOS 4.1, which is a free software update available via iTunes 10 for iPhone and iPod touch users.

Apple will unveil the iOS 4.2 later this year, which will include wireless printing, the company said.

The iTunes store consists of 11.7 billion songs downloaded, 450 million TV episodes, 35 million books, 100 million movies and 160 million accounts.

Apple’s iTunes store could soon see some competition from Google, which is expected to launch an online music service called Google Music this year. Google has already partnered with music search companies Myspace and Lala, as well as with music providers Pandora, Rhapsody and imeem. Additionally, Sony Corp. is soon to start a video and music-streaming service in five European countries to confront Apple’s iTunes store.

Although Apple faces tough competition in all of its markets, it has experienced enormous growth due to its continuous efforts at expanding into international markets, competitive pricing strategy and new product launches. We have a Zacks #3 Rank, or a short-term Hold rating, on the stock.

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