The Big Problem at Apple

Slowing iPod sales and economic jitters send its stock tumbling.

SAN FRANCISCO - JANUARY 22: Apple Store customers look at a display of iPods January 22, 2008 in San Francisco, California. Apple Inc. reported a 57 percent surge in first-quarter profit with net income soaring to $1.58 billion, or $1.76 a share, from $1 billion, or $1.14 a share at this time last year.
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A year after Apple dropped "Computer" from its corporate name, the trendsetter in flashy entertainment gear is at risk of becoming, well, a computer company. Sales of the hugely successful iPod media players have slowed, and it's unclear if gambles on new glam products will pay off.

Those doubts helped send Apple shares down 17 percent in trading this morning. Fast-growing sales of Mac PCs weren't enough to overcome worries sown by the iPod numbers, which was also buffeted by fears a recession would further crimp sales. Sales growth of iPod units fell to single digits for the first time in the quarter that ended in December, Apple reported yesterday. The decline continued a year of decelerating sales growth. "The Street is clearly concerned that iPod unit growth will deteriorate further in coming quarters," Citigroup equity analyst Richard Gardner said in a research note today, adding that he thinks the fears are overblown.

Mac sales, meanwhile, were up more than 40 percent over a year ago. "The Macintosh business is on fire," COO Tim Cook told analysts during a conference call. The Mac sales helped Apple beat overall sale forecasts, with total revenue of $9.6 billion, which that was up more than a third over last year. Profits reached $1.58 billion, nearly 60 percent over a year ago.

iPhones continued fast sales, with Apple and partner AT&T selling 2.3 million in the quarter. The sales fell a bit below some analysts' expectations, adding to concerns about the company's on-Mac products, although executives said Apple remains on track to meet the goal of selling 10 million of the new handsets this year.

But the good news for iPhone might contribute to the bad for iPods, whose sales might be cannibalized by the music-playing cellphone. That might be particularly true in the United States, where iPhones have been on sale longer and where iPod sales were flat in the quarter. Sales of iPods continued to grow overseas, the company said.

Despite slowing unit sales, revenue from iPods continued to rise. That partly stemmed from the introduction of the high-end iPod Touch, on which Apple has staked much of its future. The Touch can become the most successful mobile device yet with its WiFi connections, Cook told analysts. The goal was to get something into consumers' hands that can run all kinds of mobile applications, he said. "We overwhelmingly met this goal."

The success of the Touch and other high-end iPods might depend partly on Apple's efforts to add movie rentals to its iTunes store. Apple runs the store with little profit in an effort to sell iPods and Macs. But questions from analysts made clear the growing concern about the saturation of MP3 players. Apple's high market share and broad retail distribution also make the iPod a focus of concerns about a recession, Bill Shope, a JPMorgan equity analyst, said in a research note today: "The iPod is likely to be highly sensitive to U.S. economic conditions."

Apple Inc.