Apple, Give Us Something to Talk About

The sky's the limit, so predicting what CEO Jobs will disclose at Macworld—a Hollywood partnership? New iPhone? Music-label launch?—is a tough call

by Arik Hesseldahl

Ask any 10 people who pay attention to Apple what the company will do next and you'll probably get 10 different predictions, some that seem to come completely from left field.

Making these predictions has become a bit of an industry unto itself, as Apple (AAPL) develops its computers and consumer electronics with the sort of need-to-know secrecy usually reserved for the CIA. Sometimes Apple employees tapped to work on one aspect of a project are kept in the dark about what the final product will be.

This secrecy is part of Apple's allure, and the allure goes straight to the heart of the brand. Without secrecy, there would be much less reason to talk about Apple in the first place. But when people come to expect good-gosh surprises with every product launch by CEO and ringmaster Steve Jobs, it gets harder and harder to please. And so once again, on the eve of the annual Macworld Conference & Expo, the pressure is on.

Big-Screen News?

The emphasis of this year's announcements seem obvious, even if the specifics remain a mystery. Despite the relative ease with which Jobs forged a music industry alliance that helped Apple define and dominate the music download business, the company has been stymied so far in getting the digital-averse motion picture industry to follow suit.

So prognosticators are betting this year's big news will be a breakthrough with Hollywood for online film rentals and sales through iTunes. Along the same lines, Apple's not-yet-successful AppleTV, an Internet-connected set-top box, is expected to get a serious revamp through a software upgrade, allowing direct access to the new iTunes movie offerings. Media companies including Disney (DIS), Viacom (VIA), and Fox (NWS) are among those expected to play along. But competitors are gathering: Netflix (NFLX), Blockbuster (BBI), and others are developing online movie download services.

Maintaining Its Pace of Growth

But assume for a moment that Apple does wrestle the movie industry to the ground as it has the music business. What then? What is the next strategic imperative that will fuel Apple's long-term growth? What new products are left to invent? What industries are left for Apple to try to conquer?

It's not only a question for the gadget-loving hordes, but one of maintaining the pace of growth that investors demand from a beloved stock like Apple's. Consider this sobering fact about the iPod: Sales are up, but growth is slowing at a disturbing rate. In Apple's 2007 fiscal year, iPod unit sales broke 55 million, representing 20% growth over 2006. But in the same period, declining average selling prices slowed iPod revenue growth to only 9%, down from a 28% improvement in 2006. It seems reasonable to expect this same pattern to afflict the smash-hit iPhone before long.

Once the iPod was launched in 2001, it wasn't long before the rumors began to circulate that Apple would develop a phone that would play music. "Conceptually the iPhone was obvious," says Charles Wolf, an analyst at Needham & Co. "The long-term threat to the iPod was that the wireless phone companies would build music into their phones, so Apple had to respond." Surprisingly, it took six years for Apple to respond, but the delay seems to have caused little harm. Seven months after its release, Apple is well on its way to hitting its goal of selling 10 million iPhones by the end of 2008. Wolf expects Apple to sell 14 million by then.

Able to Cash In on Crazy Dreams

Eventually there will be several iPhone models, and annual unit sales will number in the tens of millions.