| Apple Computer was one of the pioneers of the PC | | | | and Apple can increase the number of songs |
| industry and remains so today. It is one of the largest | | | | downloaded per session, which would leverage the |
| computer companies in the world, with sales of $6.2 | | | | fixed credit check costs the company incurs per order. |
| billion in fiscal 2003. Apple designs, manufactures, and | | | | However, industry experts believe it will add only a |
| distributes a host of computer and related products, | | | | few pennies to the bottom line as Apple continues to |
| including desktop computers, notebooks, servers, and | | | | reinvest in the business. The main value iTunes brings |
| storage arrays, along with its own proprietary | | | | to Apple's business is increased awareness of Apple's |
| operating system and applications. In the past few | | | | products and Web site traffic, which Apple can use to |
| years, Apple entered the music marketplace with its | | | | cross-sell its other products, especially iPod. |
| popular iPod music player and iTunes Music Store, | | | | Understandably, Apple wants to avoid selling PCs at a |
| which sells legally downloadable songs. Apple currently | | | | loss, but unfortunately the growth prospects for |
| dominates the markets for both of these products. | | | | $1,000-plus PCs are limited. This presents a conundrum |
| iPod Forum | | | | for Apple longer term, but for now it maintains its |
| Furthermore, Apple is scheduled to come to market | | | | current strategy. Incidentally, Apple's revenue share |
| over the next few months with several new products | | | | has held much better, and while this is not an |
| that should garner significant attention and drive | | | | often-discussed topic, revenue share is probably more |
| incremental business. Apple also chose to control a | | | | important than unit share. With regard to the |
| greater percentage of its product distribution due to | | | | compatibility of Windows and Mac OS X, even though |
| the differentiated nature of its products, a strategy that | | | | Apple made a concerted effort to educate |
| has been successful to date and may have played a | | | | consumers about the ease with which these two |
| key role in the company's ability to hold PC market | | | | products work together, it has fallen on deaf ears for |
| share in two of the past three quarters after | | | | the most part. Apple made some progress through its |
| consistently losing share in the marketplace for each | | | | retail stores, where it estimates half of Mac purchases |
| of the past four years. | | | | are from first-time buyers, but for Apple's stock to |
| Our analysis indicates iTunes has the potential to be | | | | work over the long term, the company needs to |
| somewhat accretive to the overall business model if | | | | maintain share against Windows, at a minimum. |
| downloads continue to increase at their current pace | | | | |