...And now starring Tim Cook as Steve Jobs plus a look at Apple's Quarter

In a memo that spread throughout the press like wildfire, Steve Jobs, CEO of Apple (AAPL) announced that he'd be stepping away from day to day duties to focus on his health issues. The iconic CEO cited further complications in this treatment to fix a protein irregularity along with the fact that persistent rumors about his health becoming a distraction to Apple's current management team.

The media back-and-forth had gotten so bad and become such a distraction that it forced Apple and Steve to release a letter to the "Apple Community" describing briefly about his personal health issues in an effort to reassure Investors that the company was not only in good have but had Jobs for the foreseeable future. That future got murky very quickly in after hours trading with Apple shares falling 5% on the news of Steve taking a 6 month leave of absence.

And the media back-and-forth continues, as several pundits are calling Apple out for not being open enough in disclosing the true nature and severity of the health issues Steve was facing. While Apple's corporate line of a "constantly evolving" situation with Jobs will hold under most scrutiny it will not come as a shock to anyone if the lawsuits start piling higher at the desks of Apple's counsel. As share prices have eroded in the last 12 months and with Apple sitting at $80/share the $190s seem like a distant memory, and while much of decline is attributable to general market and economic factors the haze of doubt over Steve Jobs, his health, and his ability to continue on as CEO, contributed a meaningful part of the sell-off.

The memo from Jobs concludes with the friendly "see you all this summer" send off yet many outlets are skeptical of his return at all. Apple it seems has been prepared for a transition for some time. Over the course of the last year, several Apple product events have had Steve share the stage with others in an effort to showcase the brilliant team Apple has surrounded Jobs with. This was most notable at this year's MacWorld conference in which Marketing guy Phil Schiller took the stage for the keynote speech. Taking the company reins during the 6 month term will be Tim Cook, who's very familiar with all aspects of the company due not only to his Operations experience but the fact that he took over as CEO when Jobs had surgery in 2004.

Apple's product standing among consumers is the highest it has ever been with 4 major lines of business becoming part of every day lexicon (iTunes, iPod, iPhone, Macs). And with analysts trimming estimates and cutting price targets left and right something seems to be amiss. Economic stresses have weighed heavily on Apple as its upscale products tend to carry higher price points as compared with other companies. But here's the kicker, analysts expect higher unit sales than last year for the company in virtually every business category yet expect Apple to earn significantly less per share.

The company guidance from last quarter was no real help as a range of just over $1 to the $1.30s was alarmingly low for the Street. While current consensus stands in the $1.40s-$1.50s that is still off the holiday season of 2007 in which Apple posted $1.76/share in earnings and $9.6Billion in Revenue with a higher than anticipated gross margin of over 34%.

For the current frame analysts expect Apple Revenue on average at $9.85Billion and a gross margin in the 31-32% range slightly above Apple's own forecasts.

Last Year sales:
-> 2.3Million Macs - $3.5Billion in Revenue
-> 22.1Million iPods - $4Billion in Revenue
-> 2.3Million iPhones - $240Million in Revenue (Rest Deferred)
-> Music Sales - $800Million in Revenue
-> Other Hardware - $380Million in Revenue
-> Software Sales - $630Million in Revenue

All of the above translated into $9.6Billion in Revenue for the quarter with gross margins of 34.7% and income of $1.58Billion for a net profit margin of 16.5%.

Estimate Ranges for this year from analysts include:
-> 2.5-2.8Million Macs, led by the refreshed line of MacBook models
-> 18-21Million iPods, likely with a higher average selling price due to the popularity of iPod Touch
-> 4-5.5Million iPhones, down quarter over quarter due to the previous quarter 3G launch and the in-store activation policy for which gift cards were issued instead of iPhones.
-> The growth in iTunes digital music sales continues to be strong and the AppStore has become another line of business for the company with over 500Million Applications for iPhone and iPod Touch already downloaded.
-> Other hardware and software sales will likely be lower but in similar ranges, with any declines to be made up by the growth in iTunes and the AppStore.

So some quick accounting for Christmas 2008 for Apple:
-> The Mac business with 2.6Million units (0% quarter over quarter growth) at a similar $1500 average selling price translates into $3.9Billion in Revenue
-> The iPod business with 19.5M units at a higher average selling price near $190 translates into $3.7Billion in Revenue
-> The iPhone business selling 5Million this quarter and with 18Million units deferred at an average selling price of $400 becomes $900Million in revenue
-> The iTunes store, AppStore along with AppleTV etc becomes close to $1Billion in Revenue
-> Other hardware and software could fall to $800Million

Total Revenue estimates for Apple on this end come out to $10.3Billion and with a 2% gross margin drop the income calculation would be close to $1.6Billion in profits and per share earnings in the mid $1.70s. Year over year flat profit growth given Apple's product momentum paints a somewhat conservative picture to some, however given the current economic environment it still bodes very well given current analyst expectations. With analysts citing slowing demand and a weak economy the numbers just don't seem to add up for a Christmas quarter with Apple earnings in the $1.40s, however even in very pessimistic scenarios a drop of $0.30/share in earnings from the above estimate still beats current expectations.

While all Apple faithful wish Steve a speedy recovery and all the best during his treatment, the company is indeed in good hands and can still outperform the competition in the months to come. With Tim Cook at the reigns now the company has seemingly played its transition team cards and can move Steve Jobs into more of an oversight role with Tim behind the day to day reigns upon his return. The fact that Apple has such a competent and capable management team has always been overshadowed by the charisma of Jobs but perhaps in his absence the continued quality of Apple products will shine through and others behind Jobs will get the credit they rightfully deserve.

Update: January 16, 2009 Apple announced 500Million Application have been downloaded from the AppStore.

Disclosure: Author owns AAPL

Apple in the Bargain Bin around $100

Tumultuous turmoil in the marketplace has left Traders and Investors on a selling spree as the US Financial crisis spreads through the credit markets and begins to lurk in the nooks and crannies of Main Street economy. While several incredibly leveraged and debt-ridden names deserve to be under the knife of their own implosion other great companies are just being swept into the sandstorm of negativity. Apple (AAPL) is surely one of those names!

Granted, Apple was and may still be a high P/E stock and as markets contracted of late, Apple's multiples have moved in kind, despite the company's growth outlook. The supplementing downgrades near this latest bottom offer a hope that this is a bargain basement price for this still solid growth company. When analysts start piling up the downgrades like Morgan Stanley and RBC did against Apple yesterday, during the Market's worse point loss, its time to reconsider that this may in fact be a bottom.

Coupled with the White House push to get some sort of Bailout Plan passed through Congress and you've got a recipe for a potentially big turnaround. Let's take a quick look at the Apple "downgrades". The RBC analyst cut his Mac sales estimate from 3.0Million to 2.9Million units, which all things considered is still a stunning sales pace when a year ago the company shipped just over 2.1Million Macs. iPhones sales estimates, well RBC actually rose those from 5Million units to 6Million units in the quarter.

As the 3rd iPhone rollout begins, which in early October should include Russia there is very little, if any, doubt now that Apple will blow past its own goal of selling 10Million iPhones this year. It's also poised to be a 10Million Mac year, which of course will be a record for the company, not to mention the 10+Million iPods shipped every 3 months. With Apple holding an iPod event earlier this month to announce new Nanos and reduced pricing on iPod Touches the company wants to place itself within a comfortable range of consumer spending, even as that spending starts to deteriorate.

While its true a new computer favourite with consumers is the "net-book", the small screened sub $500 machines for the budget-conscious shopper on the go, but even as Apple gets more mainstream with its computer business it is still a premium niche design brand. Tiffany's doesn't suddenly start selling cubics does it? Brand recognition and popularity especially among the youth market is critical to businesses in a consumer downturn and Apple has it. All signs earlier in the quarter have pointed to a record back-to-school shopping season despite economic perils. Not to mention Apple's own claims of margin-cutting new devices coming soon, which likely include either lower priced entry laptops or the ever-rumored Tablet device.

The iPhone is the next big growth phase for Apple, as iPod users upgrade/replace existing iPods with new models or iPhones, the company will continue to see the incremental revenue from not only those device sales, their booming iTunes online music business, but now also from the sharply growing Application download business. The latter of which, providing $30Million in revenue on its first 100Million downloads in the first 2 months of operation.

As Apple's quarter comes to a close, earnings are right around the corner and as always analysts will be looking towards guidance more than anything. This is where Apple's biggest problem may be. Given the current economic climate Apple's typical lowered and comfortable guidance may hurt more now than it would help later. The important thing to remember with Apple's upcoming results is that its future is sound, with 10s of Billions in cash and deferred revenue from iPhone sales the company isn't looking at any debt, has the flexibility to still innovate and negotiate tough economic climates, especially as it captures the press in another "Steve-note" later in October to unveil new lowered price MacBook and MacBook Pro laptops (as the rumors go).

But consider this. After this quarter, cumulative iPhone sales will likely be close to 11Million units, and at $400/device on average (pre-subsidy) that's close to $4.5Billion in revenue of which an 8th will show up on this quarter's books, $550Million. When you consider a year ago Apple had total sales of $6.2Billion for the quarter, the iPhone piece is becoming ever more significant. And when Investors think about the additional $4Billion that will be padding Apple's cash horde in the upcoming quarters it will certainly make them breathe easy even in the most crimped economic spending scenarios.

Apple's cheap, it's a steal, and there are very real catalysts in the next few months (Earnings, Mac Event, Christmas Sales, MacWorld, Christmas earnings). This is a stock that could climb 50-60% from here in the next half-year.

Disclosure: Author is long AAPL

Excitement begins to spread around the globe for Apple's 3G iPhone.

With customers in New Zealand, Australia and Japan being the first in the world to officially get their hands on Apple's (AAPL) anticipated 3G iPhone, the euphoria across the Internet is reaching another fever pitch. Customers waiting in the US and Europe for Friday morning launches of the device are patiently prying into Apple's worldwide websites to get a glimpse of the updated software for the device and to get a sneak peek of the heralded application store.

Even though the updated version of Apple's trendy and hot-selling iPhone contains faster mobile network browsing and GPS, the biggest business opportunity here will indeed be the development of applications for the iPhone platform. The "AppStore" as Apple calls it is the one stop shop for iPhone and iPod Touch users to download, or pay for, additional applications for their updated devices.

While time zone differences allowed Oceania to get their iPhone 3G's first, the US and Europe will have the biggest say in terms of the devices success. So far, it's looking very good! Telefonica, one of Apple's carrier partners in Europe announced that it has taken over 300,000 pre-orders in the U.K. and Spain. It could certainly be said that this represents a much better turn-out than the initial Edge-only iPhone was able to muster when it went on sale in Europe late last year. The updated device hits the shores of 22 Countries either today or tomorrow and if the North American launch follows the initial European interest it promises to be yet another iPhone-mania weekend for the not-so-little-anymore company out of Cupertino.

Apple still has a goal of selling 10Million units by the end of the year, and considering the company is officially still well short, the 3G iPhone will need to make up those numbers in a hurry. Apple's confident in reaching their targets, analysts are confident Apple will obliterate them with new subsidized pricing, and as such shareholders should be confident that even in turbulent markets the profit factory that Apple has of late become will continue to churn, and churn loudly!

While it sells unit after unit of this new generation iPhone, the company decision to open up the platform to developers was a terrific one. The subsequent SDK and new AppStore will provide Apple with close to as much recurring revenue on each unit as they were getting in the carrier subsidies for the first generation device. Add to this Apple's MobileMe platform for iPhone users which will wirelessly sync e-mail, calendars and contacts for personal users, an "Exchange for the rest of us" as they've called it, and you've got the makings of a potentially huge wirelessly connected user-base. While MobileMe is separate from the AppStore, it does play a role in the extended services new and existing Apple customers will buy.

Applications for sale and download from the store range from Free all the way to $69.99, however a vast majority fall within the $9.99 and lower price point, including several popular games. The previously showed off Super Monkey Ball game for the iPhone is $9.99 and it already has been downloaded almost 4,000 times. And the AppStore isn't even official yet in 90% of the world.

Some quick math. 4000 downloads x $10 = $40,000
Which gives $28,000 back to the developer (a 70% cut) and $12,000 to Apple (a 30% cut).

A brief glance through the AppStore reveals over 550 Applications with surely more on the way every day/week/month. At this rate, developers should soon be enjoying the same digital distribution successes that the music and movie businesses are seeing sooner rather than much later. iTunes has truly become the one place for all things digital, and at the backbone of the entire ecosystem is Apple.

The company virtually sold ZERO iPhones in the month/2 months prior to this launch, but it appears from initial indications that they will handily make it up now through 3G device volume. With an earnings report on the horizon, the Computer and iPod business will be center stage but in the remaining 5 months of the year iPhone and the AppStore will once again be squarely on the minds of analysts, management, and in turn shareholders. Expect another stellar quarter from Apple for June (as an analyst has pegged Mac sales at 2.5Million units), and as the worldwide iPhone roll-out continues to 70 Countries and beyond in the remainder of the year, the sales figures for the device will continue to climb.

And if they ever get that deal with China Mobile worked out and unleash the iPhone to 600Million more subscribers, watch out!

Disclosure: Author owns AAPL

Apple shares pass $200, A new Record

Apple (AAPL), is also enjoying a strong holiday as iPods are as popular as ever and the Mac computers continue to well outpace the computer industry in terms of growth, and that's without even mentioning the other "hottest gadget of the year" iPhone. Apple in fact is one of the main culprits of Amazon's (AMZN) sales success as Mac computers and iPod line ups flock the electronics best sellers lists.

Whispers about sales are starting to trickle in pegging iPhone sales around 5Million units for the year, well above of most analysts 3-4Million estimates. Thanks in part to initial success with European launches and the $200 price cut that the device saw earlier in the fall. Considering that Apple's goals were to sell 10Million units by the end of next year it appears the company, for all intensive purposes, is well on its way. And its only the beginning as the device is officially on sale in only 4 countries. Once confirmed news of iPhone deals in China, Japan and the rest of Europe hits, the early sales goals will, in retrospect seem completely low-balled.

Apple's forgotten, and not so well selling device, AppleTV seems to be in the spotlight again as analysts expect an upgrade to the unit as well as the content available for it with iTunes. Apple's famous MacWorld Expo is just on the horizon and it is this event that usually brings with it product introductions, company metrics and newly minted partnerships. The hope is that Apple will bring aboard more movie studios to iTunes and perhaps expand the sales model to also include rentals. Reports coming in suggest that Fox is the first to sign on for the "rental" model and that this will be announced at the Expo. This feature should give the AppleTV some new life and perhaps force an upgrade, including the long wanted HD content in iTunes. Having Rentals and HD Video in the iTunes store come MacWorld would be 2 very big steps in the right direction to not only Apple but the entertainment giants as well.

Digital Rentals are a market that hasn't taken off yet, with many players attempting to make it work but no one dominating. Microsoft, through Xbox is trying, Amazon is trying, NetFlix and Blockbuster were trying too. The verdict, nothing really works well and each platform simply isn't wide enough. But iTunes, with its Billions of downloaded songs, and 100 million downloaded videos may just be that massive machine to get the ball rolling. Much as the demise of the CD caught the music industry off guard the last year or 2, I see a similar fate coming to DVD, with everything going digital. It doesn't help that the next gen HD disc format is in a war that is dividing consumers and studios either. So, should I get a Blu Ray player? An HD DVD player? a combo player just in case?

Too many questions, no real answer, or could there be? 120Million iPods have been sold, iTunes is seemingly on the majority on computers already, HD rentals would take off on this platform within 12-18 months pushing next gen disc formats aside as Digital content truly becomes King, Broadband expansion will make downloads quicker and that hurdle of "downloading time" will be a thing of the past.

When this rental announcement becomes official, more power to the Studios who stepped up, and didn't try to strong arm the one dominant player in the online Music and Movie sales business.

So is there still upside to the Apple story? Yes, but time frames have to be adjusted now. Forward P/E sits in the low 30s and the company is nearing it's marquee event, and its undoubtedly strongest quarterly report in history. So what's that mean for the investor? It means estimates are still too low and price targets will still continue to climb. Remember current Apple estimates only include 10-12Million iPhone sales by the end of 2008, no real clear idea of the revenue sharing model that will become a monthly cash cow for the company, and absolutely no AppleTV income, as the product hasn't sold well yet. Yes iPod growth is slowing, to only about 20% year over year, but Macs are surging to more than make up for that P/E ratio softening.

Bottom line, Apple at $200 is still a very interesting long term story, dips are great opportunities to accumulate, and this one will likely beat the market once again, by this time next year.

Disclosure: Author is long AAPL

Amazon unveils Kindle E-Book Reader, Will it Hit with Customers and Shareholders?

Amazon (AMZN) has seen a resurgence on Wall Street this year as the company has tried to change the way it does business with an influx of technology spending. Financial results has been excellent but technology results have been mixed, with the difficult to manage and use Unbox Video Service and the new and promising MP3 store. The latest offering from the Tech department at Amazon in the Kindle E-Book Reader.

It's official unveiling was today, but technology blogs and news sites have been after the device for sometime. Popular spots; Engadget (Link) and Gizmodo (Link) were on top of this latest gadget all morning. CEO Jeff Bezos claimed that he hoped Kindle would do for books what the iPod did for music online. Amazon shareholders certainly hope he's right. The stock has been bid up considerably this year but has since fallen over 20% from highs of $101/share. With a share price just under $80 the company seems like a potential strong buy, but even these discounted levels are coming from loftier highs. Amazon sports a P/E of over 90 and a trailing P/E of over 50. Even poster children for growth, Apple (AAPL) and Google (GOOG), sport ratios that are half of Amazon's.

If Kindle becomes even half of what iPod is, shareholders will have plenty to cheer about, but that is certainly a big IF. The Kindle sports some very nice features, looks small and sleek enough to justify a slight Cool factor. It's obvious Amazon techies spent a long time making sure the thing didn't look like it was beaten with an ugly stick while they shoved all sorts of hardware inside. The Kindle in essence is an electronic book reader, and any one with any sort of personal library could use one on the go for reading. So first let's take a look at the positives.

Amazon's got the content (in this case books) to support this venture, and in time I'm sure a vast majority of the Amazon library will be available for purchase for $9.99 or less. The device works with all sorts of formats but converts them to Amazon's proprietary reader format. The battery will last about 30 hours and a consumer will be able to automatically get subscribed newspapers and blogs sent to the device. That's right, the bright minds at Amazon decided to make this a wireless device that works on the cellular network for free through Amazon's covert WhisperNet. No word yet if WhisperNet is self-aware and may malfunction like its more famous cousin SkyNet. All jokes aside, the technology here is a big selling point. EVDO based cellular Internet will allow users to download books, newspapers and blogs that they have paid for, automatically and without a computer connection. So you're not killing your eyes staring at a screen the whole time the Kindle sports an e-ink screen that isn't back-lit to make reading easier. A definite plus there.

Now some negatives. It's pricey at $400 but compares relatively well to the Sony (SNE) E-Book Reader. Stylistics is a subjective game and rarely are devices or products uniformly praised for their elegance. So there's a fair chance that the public will think it is in fact a pointy, clunky ugly device, but I disagree. By no means is the thing gorgeous but it isn't bad, even if the slanted keyboard keys seem quite awkward. It's difficult to say at this point how the distribution and downloading of content will work but horror and wonder stories should trickle in as the device gets into the hands of the consumers. The real problem I see with the claim that the Kindle will be the "iPod for books" is the fact that one's personal library is as sacred as anything else in the household. The book-reading and book-owning population loves to fill shelves with books as it instills a sense of pride much more than a music collection does.

So the average song is somewhere between 3 and 4 minutes while the average book 300-400 pages. Reading a page a minute requires more than 5 hours of reading for the average book. Music is simply consumed and changed much faster than books. While carrying an entire CD collection during a trip makes little sense, carrying one book isn't all that bad. You can't exactly switch the Kindle to random and read pages from one book than another. Also, it's a well known fact that every iPod is not filled with music from the iTunes store. Majority of this music comes from CD collections that users had purchased throughout the years than ripped to the device for portable use. This process is simply not feasible with books, for obvious reasons, so to be able to take your favourites with you on the Kindle you'll have to buy them again digitally. Something I'm guessing most consumers will not want to do.

While I have serious doubts about the Kindle becoming some kind of iconic reading device, it is a very strong step in the right direction from a company that is also turning itself in that direction. While I think shares are overpriced today, a slide back towards $70 or under would make things very attractive considering there is upside to analysts estimates of $1.78/share in earnings for next year. Provided the economy in the United States stays relatively strong, and is not brought to its knees by the credit crisis and weakening dollar I would have no problem paying 35 times 2008 earnings, with upside to nearly $2/share, for Amazon and its future growth prospects.

To be as ubiquitous as the iPod, the Kindle has a long way to go but the youth of today are living in a digital age and the old adage of being able to hold on to, and feel what you buy is slowing fading away. Content will be king, content will be digital, and Amazon hopes that content will be on your Kindle.

Disclosure: Author currently does not own AMZN

Markets up Wednesday, Dow gains 99 led by General Motors

American Markets enjoyed another positive day with the Dow Jones finishing to the plus side by 99 points. The big push was provided by General Motors (GM) as it enjoyed a 9% gain. GM and the United Auto Workers Union reached a deal to renew auto worker contracts and restructure GM obligations to workers and the union. The threat of a long-term strike was lifted from the shoulders of GM and the stock jumped accordingly.

Also enjoying positive sentiment were the Investment Banks as Bear Stearns (BSC) jumped over 7% on reports that the big man himself, Warren Buffett is eyeing a stake in the company. These reports went on to say that several big banks are also interested in purchasing as much as 20% of the company. This news had investors feeling pretty good about the potential for these companies, specifically the investment banks, to overcome the losses and the mistakes that were made during the sub-prime credit situation.

In technology stocks, momentum for Research In Motion (RIMM) kept going strong as the company continues to defy gravity and bloated P/E valuations. The rule of 80-leads-to-100 was in full effect for the BlackBerry maker as it hit a high of $100.75 before settling to close at $99/share. Apple (AAPL) this morning opened to an all-time high and continued to $155 before drifting down and closing slightly lower just under $153. The recently opened Amazon (AMZN) DRM-Free MP3 store is making its rounds and while there hasn't been much of an effect on Apple's stock yet the consensus has been that this can emerge as a true competitor to iTunes.

With the quarter coming to a close investors will be keen to be placed in the right companies as the earnings season kicks into high gear.

Disclosure: Author is long AAPL

Markets Finish Higher on Bush and Bernanke Speeches while Apple's iTunes splits with NBC over Pricing

Optimism spread throughout the Financial Markets in North America Friday as Federal Reserve Chairman Ben Bernanke and US President George W. Bush presented speeches discussing the sub-prime mortgage crisis.

While not stating any certainties of an upcoming rate cut the Fed alluded to the fact that it will be ready to act if the economy becomes broadly hurt from the fallout of the credit-crunch. This was enough for investors to believe that a rate cut is more and more likely. The President conveyed a similar stance that it is not the job of the government to bail out over-extended investors, institutions and individuals. Bush did however outline a series of plans and proposals that will allow individuals to refinance some mortgages to avoid further potential loan defaults. Bush also presented proposals for slight changes to the tax code that would provide relief for people with heavy loan payments.

These were seen as positive steps by the markets as the major indices (Dow, Nasdaq, S&P, TSX) were all higher by about 1%.

In other market news Citigroup (C) is getting in on the bargain mortgage hunt as it is buying assets from ACC Captial Holdings (Parent of Ameriquest Mortgage Co.). This follows Bank of America's (BAC) recent $2Billion investment in Countrywide Financial (CFC).

In technology news Apple (AAPL) was in the news as hard-ball contract negotiations with NBC-Universal, a subsidiary of General-Electric (GE), fell apart. NBC noted that it will not renew its contract for shows in iTunes and let the current deal expire come December of this year. Apple took it one step further and stopped hosting new NBC TV Shows in iTunes before the television season starts later this September. The reasoning from Apple's press release was given as NBC demands for a 150% price increase per downloaded show. iTunes current rates are $1.99/show and NBC apparently wanted that to increase to $4.99/show, stricter piracy controls and the ability to change and bundle pricing. Apple stood its ground and talks faltered.

One of NBC's most popular shows Heroes had 23 episodes last season and at $5 a pop, a customer is expeced to shell out $115/season to be able to watch the shows on an iPod a day after it has aired on regular television. In the days of Tivo (TIVO) and the DVR the idea of drawing television audiences is about making it easier and cheaper, not more complicated and expensive. Season 1 of Heroes was just released on DVD for about $40. From a consumer perspective which party seems to have consumer interests more at heart?

There's been several editorials written about this issue including an open letter to NBC from iLounge.
Digg.com Comments (Link)
iLounge (Link)

Disclosure: Author is long AAPL, C, BAC

Universal Readies DRM-Free Music, Snubs iTunes for Real Networks et al

Universal Music Group, the music giant owned by Vivendi (EPA: VIV), has announced a testing phase of an online music plan that will see the company sell digital tracks without Digital Rights Management (DRM).

The debate over DRM has raged since the inception of digital music and the growth of Apple (AAPL) and its iTunes Store. Even Apple's head Steve Jobs wrote a letter discussing DRM on Apple's website (Link). Apple's first partner into the DRM-free world was EMI (LON:EMI) and together they launched iTunes Plus. An additional service for music that gave customers better quality tracks that were free of restrictions. These tracks could be played, burned or used anywhere, virtually on any device.

Universal has shunned the online music juggernaut that is iTunes and its 70+% market share. It has chosen to partner with Real Networks (RNWK), which has its well known Rhapsody service starting to gain some momentum in the space. The stock jumped off its 52-week low today finishing up 7% on the news. Before we jump on the Rhapsody bandwagon, investors need to consider that this 6-month Universal test is available also to online stores run by Best Buy, Wal-Mart, Amazon and Google. While some of these big net names don't exactly offer complete online music services to consumers you can see that the biggest name is missing. Apple Inc.

Contract renewal negotiations fell apart between Universal and Apple some time ago and it was clear then that Apple's firm demands were not met with smiles. Reportedly during the talks, Universal wanted changes to pricing and Apple wanted to keep the same pricing simplicity and get rid of DRM completely. It seems Vivendi's Universal unit holds a big grudge. However, if DRM-free music is truly the wave of the future it wont be long before iTunes is back in Universal's good graces. With CD sales down sharply quarter after quarter and digital sales, although growing, failing to compensate, its only a matter of time before shareholders become unhappy with the fact that the biggest music distributer in the world excluded the most powerful online music store in the test.

The question investors have to ask now is whether the 6 month test period is enough for any competing service, such as Real's Rhapsody, to gain any traction against iTunes simply because of DRM-free music? The same songs will still be available through iTunes just packaged with digital rights management. Will this be enough to lure people away from the iTunes store and into competitor online music stores, where they can buy individual songs, put them back into the iTunes media management software and load them onto their iPods? Based on market trends it doesn't appear very likely.

iTunes music sales have always been a low margin business for Apple as its been said that of each $0.99 track almost $0.70 goes to the record label and the rest covers network and advertising costs. What Apple's profit machine feeds off of is sales of iPods and Mac Computers. So for Apple shareholders is this a big deal? Well, yes and no. It isn't a big deal being shut out of the DRM-free test by Universal, however if this strains the company relationships further and Universal decides to pull songs from iTunes that could provide a significant blow to Apple's music business. Universal does sell about 1/4th of the world's music.

Anything Apple loses in the online music business will most notably be picked up by Real's Rhapsody, which would have a positive effect on shares of Real Networks. However, the online music business is still very low margin and Real as a stock I would not recommend based on this DRM-free test alone.

The music trends are clearly forming to a purely digital age with freedom and sharing being at the forefront of consumer minds. With that will come more DRM-free offerings, which will spur further music player sales. The product everyone seems to still want is the iPod and the company making that particular gadget is none other than Apple. Those executives at Universal better start to mend fences soon because not working with Apple in online music is a severe mistake, with the iPod still on the consciousness of virtually every music consumer on the planet.

Disclosure: Author is long AAPL

Animation King Disney has Bright Future

Forever known as one of the pioneers of animation, Disney (DIS) has put management reshuffling behind it and now looks refocused and determined to deliver for shareholders. Current quarter earnings were a good indication that the strategy is working. Nearly all segments of the business looked good as Disney delivered $0.58/share vs. a year ago $0.51/share and the market expectation of $0.55/share. On the revenue front Disney reported $9.05Billion vs the expected $9.02Billion.

The biggest rise came from the television unit as ABC posted strong numbers led by lower production costs and higher ABC Studio sales, as hit shows like "Lost" continue to do well in several markets. ESPN also helped here and the company even stated that ESPN will recognize $185Million more in deferred revenue in the 4th quarter than last year.

In its theme park segments Disney saw increases of 6% in revenue and 13% in operation income. These numbers were particularly strong as attendance gains were seen even as an increase in ticket prices more than offset rising gasoline prices. Management even went as far as to say that margin improvements were seen and the theme park business is very strong.

The movie division was down year-over-year due to strong DVD sales from the prior year, however with movies like the 3rd "Pirates" and "Ratatouille" coming to DVD for the holiday season there's reason to be optimistic that the movie business will be strong in the coming quarters. Disney made the big animation splash when it purchased Pixar, then became the first studio to offer movies for download on iTunes, and it is this management vision that Bob Iger brings that was lacking in years past when the company was run by Michael Eisner. While Pixer's latest film "Ratatouille" is doing well at the domestic box office, the foreign nature of the film's subject matter should propel it to much larger returns in foreign markets than its predecessor "Cars". All reasons to smile as Disney regains its position as the studio for animated features.

Disney further expanded its online strategy as it purchased Club Penguin for as much as $700Million. Club Penguin is a virtual online world for kids and already sports as many as 700,000 subscribers. A nice addition to Disney's already growing stable of online properties.

With these latest numbers Disney sports a trailing P/E of 15 and a forward P/E in the low-mid teens. With the business growing in double digits, and it looks like this will continue into next year, the stock sports a PEG of around 1.1, which is very reasonable for this kind of media powerhouse. Analysts targets should be reaffirmed after this quarter and as the average estimate is around $40/share the 18% upside makes for a healthy risk/reward ratio.

With old favourites and a growing nest of new properties there's a lot of positives surrounding the house that Mickey built.

Disclosure: Author holds no position in DIS

Market Manipulation bites Apple Inc.

Shares of Apple (AAPL) sank almost $10 in regular market trading (down almost 7%) on news that appeared to be no news at all. An article this morning on TheStreet.com (Link) referenced a "research note" from Miller Tabak & Co.

The note referenced chatter between Goldman Sachs traders that Apple had cut production on iPhone from 9 million to 4.5 million units. There was also further speculation that Apple had cut production in their iPod line also. For a company, as hush-hush about its supply-demand dynamics, Apple really let something slip, or did they? Where did this rumor come from?
With earnings barely behind the company does this make any sense? Earnings showed over 20% iPod growth and reiterated a sales goal of 10Million iPhones in 2008, so why the apparent production cut? I think the other question that has to be asked is what is really going on here? And who is Miller Tabak and Co.

Directly from the website of Miller Tabak and Co. one reads the following excerpt.
"Miller Tabak + Co., LLC (MT) is a twenty-four year old institutional trading firm specializing in the discrete handling of stock purchases and sales, portfolio rebalancings and listed options. We act as agent on behalf of sophisticated institutional investors, executing trading and hedging strategies imaginatively and aggressively."

I for one would call creating rumors out of speculative trader talk as both imaginative and aggressive. With the stock trading down heavily in the morning there was some talk out of Miller Tabak and one analyst, Peter Boockvar, in particular who noted that no research note was issued and simply gossip was passed down. If that's all it takes to shave almost $8Billion in market cap from this leading technology company than the market is more fickle than most would like to even imagine.

Granted the overall slide in technology stocks late in the day only compounded the problem but the seeds of doubt had already been planted. And on a day where Apple announced it had sold its 3Billionth song on iTunes.

Taking a hard look at this "research report" can point an investor only one of two ways. On one hand, if the rumors were in fact totally made up to stir selling so heavy-hitters can buy in at lower prices and extend profits further into the holiday season then that's complete and utter market manipulation. On the other hand, if there's any shred of truth to a production cut for iPhone, then maybe Apple's in serious trouble. But for this to come out only days after earnings with the company reiterating its sales goals for all of 2008, make little to no sense. The company did say several times during their conference call that product transitions would take place this quarter, which to several analysts meant either new iMacs, new iPods or both. So if Apple's cutting production on some iPods lines how could that be considered a bad thing? If this is to lead to a model refresh of the top of the line video iPod, or mid-range iPod nano or both, common sense would dictate that this would spark sales and growth rather than stunt it.

Perhaps the worst is not over yet in this drop from inflated highs for Apple stock, but those faithful Apple investors who believe in the company products and growth strategy should remain patient. And in fact have to use these opportunities to add to current positions so they too can play the game and be competitive with the "Big Bad Wolves" on the street.

Disclosure: Author is long AAPL

Satellite Radio and Apple Inc.

An interesting combination, that probably engineering teams on both sides have thought of. Could the iPod have the ability to let its users listen to Satellite Radio?

Apple (AAPL), XM (XMSR) and Sirius (SIRI) could do decently well for each other by talking about this. The satellite radio companies have each tried to develop and release their own handheld device to overall little fanfare and now with the merger news swaying back and forth almost daily, the main talking points seems to have shifted from growth in the industry to cost savings from synergies. Why not take a look to the poster child of growth and innovation and figure out a way to spark subscription sales?

How many car owners would continue their Satellite Radio subscription after the free 3 month trial if they knew they could get satellite radio streams on their iPods and through iTunes?
Apple and AT&T have just revolutionized the wireless industry consumer sign-up process, so why couldn't they try to do the same thing for satellite radio? Wouldn't it be relatively easy to work out a sign-up process through iTunes so new and existing customers of satellite radio could activate the availability of getting their radio on their next gen iPod/iPhone? The potential new subcriber additions for the Satellite radio companies is huge.

First major question is the engineering involved, could it be done right now? Is there a way for the brilliant engineers of Apple, Sirius and XM to figure out how to put the satellite radio decoding hardware into the same/next generation shapes of the iPod and the iPhone?

Second major question is monetary. Certainly Apple would demand a share of monthly subscription revenues, perhaps an upfront connection fee and total control over the engineering involved with the hybrid devices. Would Sirius or XM agree to those terms? Seems like we're talking iPhone all over again and that's seemed to work out well for AT&T so far (With the official sales word coming next week during Apple's quarterly earnings report).

I can certainly see such an announcement would benefit all the companies involved. With Satellite Radio still being an industry of fluctuating but sustainable growth it seems like spark is needed to reignite the passions of investors in shares of Sirius and XM. The merger talk and cost savings have taken their toll on both companies year-to-date and while there is no guarantee they will be allowed to merge, an idea like this could put both companies subscriber numbers back on the path of blockbuster growth.

Disclosure: Author is long AAPL & SIRI