iPod Supply Blemishes Apple

Does the 6% share drop, on the settled lawsuit and rumors of surplus, augur a slow third quarter?
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fell nearly 6% on Friday amid a lawsuit settlement and concerns about sales of its iPod and Macintosh products.

The company confirmed Thursday that it has agreed to settle a suit concerning the advertised battery life of its iPod products, according to published reports. The settlement, in which Apple will provide a $50 voucher to certain iPod owners, could cost Apple $100 million to $150 million, according to analyst reports.

Meanwhile, a report on

AppleInsider

, citing unnamed sources, said that Apple is sitting on surplus inventory of its iPod shuffle and iPod photo models, and is well-stocked on its other iPod and Macintosh lines. That situation would represent a reversal for Apple, which

has battled supply constraints in the past for its hit products, and could indicate slowing demand.

Apple representatives did not immediately return calls seeking comment.

In recent trading, Apple's stock was off $1.87, or 4.7%, to $38.17. Earlier in the session, the shares were off as much as $2.27, or 5.7%, to $37.77.

The fortunes -- and stock price -- of Apple rebounded last year with surging sales of its iPod music players. Many analysts and investors have been counting on the iPod's popularity to reignite sales of Apple's Macintosh computers, which provide the bulk of the company's revenue and profits.

But the recent reports are only the latest signs of trouble for Apple's iPod line. Some analysts, for instance, have already begun to worry that the iPod fad may have reached its peak.

In a research report earlier this week, Goldman Sachs analyst David Bailey said checks of Apple's supply chain indicate that the company's iPod sales will come in about flat in its fiscal third quarter compared with its second quarter.

"We expect sequential iPod growth to come in lower than what investors have become accustomed to, suggesting that upside, which we still expect, should be less than it has been," said Bailey, whose firm has done investment banking for Apple in the last year.

Assuming Bailey is correct, the flat iPod revenue would follow the sequential decline in iPod sales the company recorded in its second quarter, as the prices it saw on a per-unit basis plunged. Meanwhile, the company

slashed the prices of its top-of-the-line iPods in February.