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Can Apple’s iPad Restore Paid Content?

Posted on Wednesday, Jan 27th 2010

Apple (NASDAQ:AAPL) reported a strong first quarter this week, but what is grabbing the headlines is its new product, the iPad. After the success of the iPod and the iPhone, Apple and just about everyone else are ready for another innovative product. Will our high hopes be fulfilled?

The iPad, true to the many rumors, can be used to read books, play games, watch video, and browse the Web. What comes as news is that it is built on a chip made by PA Semi, which was acquired in 2008, and that it is priced between $499 and $830. Tech Crunch gives out the specs of iPad.

Referring to the Kindle, Steve Jobs said, “Amazon has done a great job of pioneering this technology. We’re gonna stand on their shoulders and go farther.” Here is an interesting analysis from RWW on why the iPad may beat out Kindle.

Apple has partnered with major publishers, including Penguin, HarperCollins, Simon & Schuster, Macmillan, and the Hachette Book Group to provide content for its iBookStore. The New York Times showcased its application that has embedded video and breaking news updates. The iPad event provided just a glimpse of how the reading experience can be media enriched. And the struggling media industry hopes it will increase the market for paid high quality content. Publishers now realize that online revenue potential does not exist only in display ads and destination Web sites but in getting to high-quality, specialized content. It is expensive to produce good content, and today consumers don’t pay for content. This model is destroying the media industry. Will the iPad become its savior?

Let’s now take a look at Apple’s financials. Apple has elected to adopt a new accounting system that allows it to recognize more iPhone and Apple TV revenue up front. In the previous system, it spread out revenue recognition over two years. Q1 results follow the new system, and revenue in the first quarter increased 32% to $15.68 billion. Net income was $3.38 billion or $3.67 per share compared to $2.26 billion, or $2.50 per share. Analysts expected earnings of $2.08 per share on revenue of $12.08 billion. How often do you see a company blow analyst numbers by over $3 billion in a quarter? The analysts must be feeling a little stupid!

Mac shipments were up by 33% to 3.36 million. Response to the new iMac introduced in October was very strong, contributing to 70% growth in desktop sales, while portable computer sales increased 18%.

Apple sold 21 million iPods in the quarter, down 8% from last year, but the 55% growth in sales of the iPod Touch resulted in an overall iPod ASP increase of 9% and revenue growth of 1%.

The company sold almost 8.7 million iPhones in the quarter, up 100% over last year. Recognized revenue from the iPhone handset sales, accessory sales, and carrier payments was $5.58 billion compared to $2.94 billion last year. The sales value of iPhones sold during the quarter was over $5.4 billion, resulting in an ASP of about $620. Apple says that demand for the iPhone in the corporate environment has been building up since the launch of the iPhone 3GS. It has over 70% of the Fortune 200 deploying or piloting the iPhone. The app store continues to be an unparalleled success, with more than 3 billion downloads to date by iPhone and iPod touch users in 77 countries.

Apple ended the quarter with $39.8 billion in cash, compared to $34 billion last quarter. Gross margin was 40.9%, up from 37.9% last year. Apple recently bought the wireless advertising concern Quattro Wireless for $275 million, the Web music service Lala, and location software company and Google Maps competitor PlaceBase for an undisclosed sum. Earlier in 2008, it acquired PA semi for $278 million, in sync with its tradition of making smart but small acquisitions. Between 2001 and 2002, Apple went on a buying spree with eight small acquisitions. Apple once again seems to be developing quite an appetite for acquisitions and even hired Goldman Sachs investment banker Adrian Perica in order to have a dedicated M&A specialist on board.

Under the new accounting principles, Apple expects revenue to be between $11 billion and $11.4 billion compared to $9.1 billion in the March quarter last year. Gross margin is expected to be about 39%. EPS is expected to be about $2.06 to $2.18 compared to $1.79 in the year-ago quarter under the new accounting principles. The stock is currently trading around $208 with market cap of about $188 billion. It hit a 52-week high of $215.59 on January 5.

Chart for Apple Inc. (AAPL)

Steve Jobs has repeatedly taken entire industries and reinvented their future. From computing to film, from music to phones, his unique talent for combining business model innovation with product innovation is unparalleled. If Jobs can now reinvent the future of media, it would be a much-needed answer to the prayers of millions of writers, journalists, and content producers, and publishers who are sick of giving their intellectual property away free. Good luck, Steve!

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Isn’t it all supply and demand?

At the rate at which the internet is penetrating homes today, it is creating far too many content producers and consumers each day and even if Steve can pull this model off, there are so many top content producers who would still offer their stuff for free (with Google Ads of course!) and so many consumers that still won’t pay.

Ram Wednesday, January 27, 2010 at 2:48 PM PT

Do you see WSJ offering its content for free? Do you see The Economist offered for free? Do you see Bloomberg for free? No.

Content producers have to, like everyone else, make money. It costs a fair amount to produce good content. At some point, the “free” content bonanza becomes unviable.

Sramana Mitra Wednesday, January 27, 2010 at 3:00 PM PT

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