Unraveling the Zune vs. iPod Battle Cont'd

September 14, 2006

Take a closer look at Microsoft and Apple’s new portable digital media players, and their prospects for the upcoming holiday season.

Apple continues to exert its dominance and understanding of the market with its new models. Instead of simply targeting a more prestigious audience, the company offers additional models to cater to users needs. Apple has reintroduced colors beyond the traditional white to its new Nano models, as well as larger capacities. These improvements come at no additional expense to consumers, and may actually improve Apple’s profit margins due to declining flash memory costs.

Craig Berger of Wedbush Morgan Securities estimates cost savings for Apple of up to $58 per 8-gigabye Nano shipped, resulting in profit margins as high as 50%. Cypress Semiconductor (CY), Linear Technology (LLTC), National Semiconductor (NSM), and Silicon Storage Tech (SSTI) will all remain suppliers of various components for the Nano.

On the Video iPod front, the 30 gigabyte received a price cut down to $249 apiece, and a larger 80 gigabyte version was released for $349. Both iPod’s will feature “gapless playback,” resulting in no lag between songs, a welcome addition for enthusiasts and casual users alike. The screen will be 60% brighter than the year-old models and offer search features to find music more easily.

Why is Microsoft embarking on an additional money-losing campaign? Some will argue that Bill Gates would simply like to take over the world of electronics, but it is more likely due to the fact that Microsoft is a mature company with little room for quick growth, and is looking for stable streams of revenue. On the other hand, Apple is currently valued at a quarter of Microsoft’s value with more room to grow. After numerous Vista delays, Microsoft has gotten back on track, and shareholders have been rewarded with 20% appreciation in the period. Hefty buybacks from Microsoft’s huge cash-pile have also helped. Today, Microsoft even announced that it will raise its quarterly dividend to 10 cents a share from 9 cents previously.

Apple has gained 28% over the same period, but analysts are more optimistic of its prospects of reaping a glorious holiday season. After peaking out at about $85 a share in January on the heels of record iPod and Mac Christmas sales, Apple shares were sold off down to just above $50 mid-July. The stock is marching back higher just as it did last year. From mid-September 2005 to mid-January 2006 Apple jumped from $50 to $85, and a similar jump is not out of the question.

Apple is the true pioneer in the digital media player market, and it will be difficult for Microsoft to make significant inroads with the Zune. Despite the wireless capabilities of Zune, brand loyalty is formidable for the iPod. The increased competition for Apple will help drive additional pressure for better products and consumers will benefit. These new innovations will boost Apple’s bottom-line earnings, and help Microsoft have a prescence not only on your desk and living room – but also your pocket now. Ironically, switching from an iPod to Zune for many users will be like the idea of swapping a Windows for a Mac – simply unimaginable.

At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.