iPods Could Transform Apple Computer

"I've always thought of iPod as icing on the cake, not enough to buy the stock by itself," said Robert Rhodes, manager of the (STCIX Quote)STI Classic Capital Appreciation fund, which has a stake in Apple. "But it does illustrate the fact that here's a company that's been able to do very creative things and create products that people want to buy."

To be sure, it shouldn't come as a shock that a company famed for its design prowess should roll out an eye-catching consumer device. More notable is that Apple has lately shown surprising deftness on the strategic front, too.

Marketing the Engineering

In October, Apple made its online music store accessible to Windows PCs, dramatically expanding the iTunes market. Soon after, it struck a surprise deal to let Hewlett-Packard(HPQ Quote) resell its iPod players under the H-P brand, starting this summer. H-P will also load all of its consumer PCs and notebooks with Apple's iTunes jukebox software.

Taken together, the decisions suggest Apple may be rethinking its traditional disdain for the consumer mass market.

"The deal with H-P is in my mind crucial to Apple's success," said Charlie Wolf, an analyst at Needham & Co. "You've nabbed the biggest consumer PC company into selling the iPod, [which currently] sells at around 8,000 outlets. H-P has 110,000 retail outlets around the world." (Needham hasn't done banking for Apple, but Wolf owns shares in the company.)

On the downside, as more competitors crowd into the digital music player market and Apple inevitably reduces prices, most believe iPod margins are bound to drop from the current 26% level, probably to around 20%. And plenty of analysts question whether the iPod really will spur Apple computer sales.

As Apple's December quarter results made clear, Wall Street still cares far more about the PC business than iPod momentum. Despite surging iPod purchases, which helped propel revenue above expectations, investors honed in on disappointing unit sales of PowerMac and iMac computers.