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Apple's iPod Still Rules, But Rivals Are Circling

Tuesday, 4 Sep 2007 | 6:08 PM ET

Apple, which is widely expected to announce a new line of iPodson Wednesday, has managed to stay one step ahead of the competition--so far.

Apple iPod
AP
Apple iPod

Though Apple is mum on the details of its "product launch" in San Francisco, many believe a touch-screen iPod similar to the iPhone will be among the innovations being introduced. There's also speculation about possible Wi-Fi connections for the iPod and even an agreement to bring the Beatles catalogue to iTunes.

"One thing that has set Apple apart from its competitors is its ability to define the rules of the game," says Andrew Neff of Bear Stearns. "Whatever they announce tomorrow, you can be sure that their competitors will be trying to catch up with them but it will also be trend-setting."

Though Apple dominates the digital music world, it is increasingly being challenged by such heavyweights as Sony, Nokia, Yahoo and Amazon.com .

Sony, for instance, recently launched a new U.S. version of its Sony Walkman that includes the ability to play digital video. Nokia the world's largest maker of mobile phones, unveiled an online music store and new high-end handsets with music and video game playing capabilities. And Yahoo is offering an unlimited music subscription service to rival Apple's iTunes.

Threat From Amazon

Meanwhile, Amazon is widely expected to launch a revamped music-downloading service this month, posing what may be the most serious threat to Apple.

"That's one to keep your eye on," says NPD Group's entertainment analyst Russ Crupnick. "You have potential with Amazon because music aficionados like Amazon from buying the physical music and they like the Amazon model. The more simplicity there is, the more chance there is the barriers that Apple has built up may start to fall a little bit."

Despite this growing threat, most stock pickers are bullish on Apple's prospects. About three-quarters of all the analysts who cover the stock rate Apple at "outperform" or better, according to Thomson Financial. And the stock has not disappointed investors, sporting year-to-date gains of more than 60%.

Apple has kept a stranglehold on the music-downloading space, maintaining a market share of about 70% over the last few years for single-song downloads, according to data culled by research firm NPD Group.

Music sales through iTunes make up just 11% of Apple's $5.4 billion in quarterly revenue but the service is seen as a synergistic with its bread-and-butter iPod hardware business.

"Apple is the only one that has hit on the holy trinity of software, a store and hardware," says Crupnick. "Apple has created an ecosystem with the iPod where customers manage all their music through iTunes, buy music through iTunes, which all works well with the iPod."

Moving in on Apple's Turf

Still, more companies are trying to move in on Apple's turf. Viacom's MTV Networks recently combined its online music store Urge with RealNetworks' music subscription service. The new service will be accessible from computers or portable devices and will also be integrated with the Verizon's VCast cell phone service.

Vivendi's Universal Music also is testing the sale of songs without copyright protection through outlets such as Google, Wal-Mart Stores and Amazon.com, a move that some analysts say may change the current paradigm.

But many efforts to challenge Apple have not lived up to expectations.

Microsoft's launch of the Zune media player received a lukewarm reception. Microsoft was forced to slash prices with may lower prices even further. Still, a new 80-gigabyte Zune could be on the way soon, according to recent reports, an indication the software giant remains determined to tap into the tech hardware arena.

Challenge for Everyone

For Yahoo , which offers an unlimited music subscription service, it is somewhat unclear how lucrative the online downloads business is.

"I'm not sure anybody is making a whole lot of money," says Crupnick. "If you were to look at some of the financial statements it's been a real challenge for everyone whether it's a subscriptions model or a hybrid like eMusic."

Despite all the competition, investors should buy Apple shares, advises Pacific Crest Securities' analyst Andy Hargreaves. The company, he says, "has a tendency to go above and beyond people's expectations."

Even so, Hargreaves expects Apple's product announcement to be "fairly minimal" to the company's long-term picture.

"We would be buying it for the Macs, the iPhones and the iPods," he says.

Peter Kang is a markets reporter at CNBC.com. He can be reached at peter.kang@nbcuni.com.

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