The Word on the Next iPod: Flash.

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Author: Salkever, Alex

BYTE OF THE APPLE

Despite denials from Jobs & Co., the buzz is building that Apple is ready to launch a digital music player that uses a memory card

Apple (AAPL) CEO Steve Jobs has always approached his job with the zeal and showmanship of a populist politician. Jobs has another attribute common to the political classes, namely that even when he says "never," you can never really be sure.

Savvy Mac watchers immediately noted with irony that the new version of the iMac desktop computer is almost an exact description of what Jobs said he didn't want the previous generation of iMacs to be, namely, a grounded, monolithic, and less flexible piece of hardware. And don't forget his whopper about Apple never writing any software for Windows machines. That one went up in flames when Jobs unveiled a version of iTunes for the Microsoft (MSFT) hordes.

So one would do wise to consider with great skepticism Apple's denials that it remains wholly uninterested in digital music players based on solid-state flash memory cards rather than hard drives. In fact, the Macosphere is abuzz with rumors that Jobs will reveal a flash-memory music player at the next Macworld expo in January.

BROADER PORTFOLIO. Why would Apple do this? When Jobs introduced the iPod Mini in January, 2004, he explained it was designed to compete with high-end flash-based music players of comparable cost but that had far less capacity.

That's still true, but the flash player market remains healthy and significantly larger than that of hard-drive music players on a global basis. And the strongest sales for flash players are in countries where Apple remains weak, namely in the Far East.

At the same time, Apple is furiously working to build up a broader portfolio of consumer-electronics offerings to capitalize on its current dominance of digital music downloads. The upshot? Expect a flash iPod to hit shelves sometime next year.

MILLIONS OF NEW USERS. As with any new product Apple may be planning, no one -- but no one -- from the company would comment on the record about this. And only a single analyst, Jason Pflaum of investment bank Thomas Weisel Partners, told the online Apple newsletter Mac Observer (www.macobserver.com) that his sources in Asia say a flash iPod is imminent. That echoes what other analysts have been saying off-the-record for well over a month: Apple will likely build one of these players around a chipset from SigmaTel (SGTL). The world's leading supplier of digital music chipsets for flash players, SigmaTel has between 65% and 70% market share.

The new flash Pod's price will significantly undercut existing iPods and dip well below the $200 mark. That could bring in millions of new users who remain skittish at the higher prices on iPods and other hard-disk music players.

What's more, those users are definitely out there. SigmaTel shipped 5 million MP3 controller chips in its most recent quarter, ending Sept. 30. Other significant companies include Portal Player, which supplies chipsets for the iPod, and Texas Instruments (TXN), which makes chips used by Dell (DELL) and other digital jukebox makers. The SigmaTel shipments alone imply that the global flash player market is significantly above 35 million units on an annual basis.

iPod, which clocked 3.2 million units sold in the last quarter, is logging an annual sales rate of roughly 13 million units. That leaves Apple plenty of room to maneuver if it wants to assault the flash player market.

INTERFACE CHALLENGE. What's more, even though a move into the lower end goes against Apple's grain, Jobs & Co. could probably bag decent profits on flash iPods without dragging down Apple's operating margins. Of course, that's assuming Apple manages to sell flash players at a slight premium, which Jobs sure has done with the iPod hard-disk players.

The profitability enhancement could come from falling prices of flash memory, the biggest cost in these devices. Flash prices will likely plummet in 2005 as additional factories come online and existing ones ramp up. Also, manufacturers roll out new technologies that can jam more memory onto each flash chip.

How Apple will handle a flash interface remains a mystery, however. These players have traditionally been much smaller than hard-drive devices and sport displays that are only a fraction the size of those found in the current iPod lines. And Apple will have to think creatively about how it can market players with far less bang for the buck compared to Apple's other digital music players.

Still, the numbers are compelling. If Apple could sell just 5 million flash IPods in the next year at prices between $120 and $199, that would likely generate revenues of between $600 million and $1 billion. It would certainly push Apple closer to its goal of rejoining the $10 billion revenue club in the next two years. Add it all up, and the flash iPod hardly looks like a flash in the pan.

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By Alex Salkever