Apple Inc. (AAPL) is en route to strengthening its competitive advantage over its peers as the company’s chief executive, Steve Jobs unveils the iCloud. It is expected that the CEO will announce its new online cloud services offering on June 6, 2011 at the Worldwide Developers Conference (WWDC) in San Francisco.
This iCloud service is an online offering to store digital files like photos, music and videos. Music for Apple has been one of the strongest domains, and Apple would like to offer iCloud services to its customers, enabling them to create, store and listen to their music collection online by streaming onto any web accessible device, such as the computer, smartphone or tablet. Apple also has plans for further enhancements to its iCloud services
According to sources, Apple has already signed agreements with three major record labels, namely, Warner Music Group Corp., Sony Corp.‘s (SNE) Sony Music Entertainment and EMI Group Ltd to provide the music collection as part of its iCloud services. Apple is also in talks with Vivendi SA’s Universal Music Group and is expected to sign their fourth agreement this week, according to reports from the Wall Street Journal.
We believe that Apple would gain significant traction with this iCloud service, as it has roped in some major music companies and has a wide array of music to offer. This would not only boost sales from existing Apple customers, but might also attract new customers in the coming days. However, Apple is yet to finalize the deal with music publishers, so there could be a last-minute hitch.
The dominance of Apple in digital media services is reflected in its 200 million+ iTunes accounts. We believe the iCloud improves Apple’s ability to provide customers a wider range of music, strengthening its position versus major companies like Google Inc. (GOOG) and Amazon.com Inc. (AMZN). Both of these have a similar sort of a service but they do not have licensing deals with music companies.
Given the loyal customer base, international expansion, competitive pricing strategy and solid cash position, we remain optimistic on Apple’s long-term growth. However, increasing competition in most of its major product segments, possible delays in product launch, higher operating expenses and increasing legal complexities compel us to maintain our Neutral rating over the long term (6-12 months).
Currently, Apple has a Zacks #3 Rank, which implies a Hold rating in the near term.
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