Demand Drag Gnaws on Apple

If recent developments are any indication, Apple (AAPL) could have sour news for investors when it reports earnings next week.

Announcements from two companies in the digital music player sector -- and even from Apple itself -- suggest that demand has slowed in recent months. And some analysts worry that such a slowdown could signal a maturing market. Either way, muted demand could have a considerable effect on Apple, whose popular iPod music players have supercharged the company's revenue and earnings over the last two years.

The indications of slowing growth in the digital music player market have come from multiple sources recently:

SigmaTel(SGTL), which provides flash memory chips used in lower-end digital music players, slashed its second-quarter revenue outlook last week, citing slowing demand from manufacturing customers and worse-than-expected retail sales of flash-based players. Company officials declined to say whether Apple, which uses SigmaTel chips in its iPod shuffle players, was among those customers whose sales slowed, but the company did say the slowdown was "broad-based."

SigmaTel's announcement came one day after Creative Technology (CREAF), SigmaTel's second-biggest customer, cut its own revenue outlook. Creative blamed the shortfall on weaker-than-expected demand for digital music players in the quarter and on a decline in average selling prices for its players.

Meanwhile, Apple cut prices on two of its music players last week and began offering a color-screen version of its flagship 20-gigabyte iPod at the same price it previously offered a monochrome version. The company is now charging about $400 for its top-of-the-line 60-GB iPod. Apple has slashed the price on that model twice this year, bringing its overall price down by $200 since February.

The price cuts may point to slow demand at Apple for those products, if not for the company's whole iPod lineup, analysts say.

But there are other signs that iPod demand in particular is no longer outstripping supply as it did in previous quarters. Apple now promises to ship every product in the iPod lineup ordered through its online store on the same business day. When the flash-based iPod shuffle was released earlier this year, consumers had to wait at least two weeks for one.

And rumors and analyst reports suggest that iPod inventory is starting to build up. Although Apple's overall sales fell sequentially from its first quarter to its second quarter, its total inventory and days sales outstanding swelled over the same period. Analysts suggest that inventory has continued to grow in its just-completed third quarter. While an inventory build can sometimes mark an anticipation of stronger sales in later periods, it can also be a red flag, signifying slowing sales.