Update from 9:23 a.m. EST Apple ( AAPL) shares gained Thursday after the company reported surprising strength for its iPod Mini digital music player, introduced in February. Demand for the slimmed-down version of its coveted music player has been "much stronger than expected" since it started shipping in February, "far exceeding the total planned supply through the end of June," Apple said in a statement. As a result, the company pushed back the worldwide availability of the product to July from April so it can boost manufacturing. Apple shares were recently up $1.03, or 4%, to $26.53. Thursday's news appeared to relieve investors who worried Apple might have priced the Mini too high. At $249, it costs about the same as a similar device from Dell ( DELL), but with less storage. Some observers had expected a version in the $100 range. "The iPod Mini is a huge hit with customers in the U.S. and we're sure it will be the same worldwide once we can ramp up our supply in the July quarter," Apple said in a release. In practical terms, the delay in the overseas rollout is less of a setback than it may appear. Apple's online music store, which is the only service compatible with iPods, isn't yet available for European users. In fact, no pan-European music download service exists yet, due to the patchwork of copyright laws that companies must first negotiate before setting up shop. "You don't want to get the
iPod hardware out too far ahead of the availability of the store," said Mike McGuire, research director in the media group at Gartner G2, the business strategy research group. Both Apple and Roxio's ( ROXI) Napster have said they plan to enter the European market later this year. Meanwhile, robust consumer adoption of iPod Minis should only reinforce the position of iTunes, Apple's music store. "Once someone has an iPod, they're not changing from iTunes because iTunes is designed to serve iPod users. All the other services are not compatible" with iPods, said Scott Kessler, an analyst who follows Internet software and services stocks for Standard & Poor's Equity Research.
To be sure, some recent media reports have pointed out that at its current run rate, Apple may miss its goal of selling 100 million songs in iTunes' first year of existence. As of mid-March, consumers had downloaded 50 million songs from iTunes. Meanwhile, competition has been increasing in the online music market.
Gunning for AppleOn Tuesday, Wal-Mart ( WMT) formally debuted an online music store that allows users to download songs priced at 88 cents each, compared to 99 cents at iTunes. Analysts say the move reflects a bid to attract traffic to the giant retailer's Web site rather than a serious push to make money in online music. With 300,000 songs available for download, Wal-Mart's store offers a shallower selection than iTunes, which offers over 500,000 songs. "I can't imagine others catching up with iTunes," said an Apple spokesperson, referring to Wal-Mart's formal debut in online music. Still, the sheer size of Wal-Mart's customer base could mean that it will steal some business from existing online music players. Wal-Mart's entry into online music "incrementally may have some kind of impact on iTunes," said Kessler. But he noted that Wal-Mart's online music store has actually been functional since December (Wal-Mart said it was beta testing the site during that time). "It's not a foregone conclusion that just because Wal-Mart has the service, people who go to Wal-Mart stores will walk into the proverbial online music store," Kessler said. "That's borne out by the fact that it's existed since December, and I don't think it's had near the kind of downloads as iTunes has." Wal-Mart spokesperson Amy Colella said the company couldn't comment on the number of songs consumers have downloaded off its Web site, though she said demand had "exceeded expectations." Looking ahead, many other competitors could soon hit the scene. Sony ( SNE) is reportedly negotiating with McDonald's ( MCD) on a deal to promote its soon-to-launch online music service. Also aiming to compete with Apple, Microsoft ( MSFT) plans to roll out digital music players running its software. It's already said the products will hit the market in Europe in the second half of 2004.
Other big players believed to be considering a move into online music include Amazon ( AMZN), Time Warner ( TWX) and Vivendi Universal ( V), noted Kessler. "There will be a lot more players that are going to make themselves known and probably detract from Apple's market share," he said. "But the fact remains that, perhaps with the exception of Sony, there really isn't going to be someone with
an integrated strategy as well delineated and executed as Apple. And Sony hasn't even launched yet." In December, Apple struck a deal that will ensure a wider audience for its iTunes service by linking up with PC behemoth Hewlett-Packard ( HPQ). At a major consumer electronics show, H-P said it will preinstall iTunes on all of its consumer PCs starting this summer. The H-P deal could help Apple extend its lead in the digital music market -- and Apple will need that help as competition in online music business heats up.