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How iTunes Is Threatening iPhone Sales

By Trefis.com

Apple's (AAPL - Get Report) iTunes store faces competition from Microsoft's (MSFT) Zune store and Google's (GOOG) upcoming music store, along with a few smaller players. Apple will probably soon make iTunes available on the cloud. This means that Apple will stream iTunes content like music, movies and videos from its servers directly to mobile Apple devices like the iPhone and iPod, along with Apple's desktop and notebook PCs.

Factors driving iTunes onto the cloud include: Limited storage space availability on the iPhone, better cloud infrastructure availability from Google and Microsoft and cheaper subscription plans offered by smaller players. We believe that a delay in executing the iTunes cloud strategy could hurt Apple's stock.

Potential Downside to Apple's Stock

We estimate that iTunes constitutes about 3% of the $296 Trefis price estimate for Apple's stock. We expect the number of song downloads from iTunes to increase from about 2.6 billion in 2009 to around 6.9 billion by the end of the Trefis forecast period. In an alternate scenario, iTunes downloads could suffer because of the increasing competitive threat from cloud service providers.

However, the bigger downside effect for Apple could be on its device sales. We estimate that iPhone sales account for just over 50% of Apple's stock value. Customers increasingly base their mobile phone purchase decisions on the phone's music and video experience and its associated cost. Apple could lose potential iPhone customers due to the current lack of music and video streaming options on iTunes. There could be a downside of more than 5% to the $296 Trefis price estimate for Apple's stock if iPhone loses 1% market share by the end of the Trefis forecast period to reach around 10% instead of the 11% that we forecast.

iTunes Availability Over Cloud Could be Inevitable for Apple

Here are three reasons why streaming iTunes content could be inevitable for Apple:

1. Limited storage space on Apple's mobile devices

The Apple iPhone comes with a maximum storage of 32 gigabytes. The iPhone 4 offers advanced features like the ability to view space-hungry HD video. These videos can require storage space running into the tens of gigabytes, making it increasingly difficult for users to store these videos on their iPhones.

2. Google and Microsoft Have Better Cloud Infrastructure

Microsoft and Google are bigger cloud infrastructure players than Apple. Microsoft's Zune store already offers a large amount of streaming content. We expect Google to leverage its strong position in cloud infrastructure technology by releasing its own music subscription service in the future.

3. Smaller Players Offer Cheaper Subscription Plans

Smaller players like Pandora, RDIO, MOG, Napster and Rhapsody provide streaming services at a fixed monthly subscription price. This can be a cheaper option than purchasing a song or movie outright through iTunes.

You can see the complete $296 Trefis Price estimate for Apple's stock here.

Trefis is a financial community structured around trends, forecasts and insights related to some of the most popular stocks in the U.S.

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