Analyst: Apple’s Rumor site litigation could hurt profits - Macenstein

Analyst: Apple’s Rumor site litigation could hurt profits

Posted by Igor

In a 3 pm conference call today, Phillip McKracken, who covers Apple Computer Inc. for Thomson Financial, said Apple’s recent litigation against such rumor sites such as Think Secret and Apple Insider will likely take a “bite” out of Apple’s profits this quarter. Says McKraken, “…looking forward we expect to see profits in-line with estimates. However, a not unsubstantial increase in advertising/marketing costs is likely to take somewhere between a 33% to 48% out of this quarter’s results, and Q1 of next year may be as high as 50% or greater.”

While Apple’s stock price is currently soaring high, McKraken’s reasoning is based on the results of a recent audit of Apple’s advertising budget. On average, Apple spends only (US)$1,300 a month on advertising. Out of that amount, (US)$950 goes to print ads in Macworld Magazine. Apple’s only other source of advertising comes in the form of the wild rumors various websites publish (either with or without any cold hard facts to back them up) and then the resulting coverage and dissection of those rumors by the mainstream media.

“Apple’s business model is almost entirely word-of-mouth”, says McKraken. “In silencing these rumor sites, Apple has pretty much erased any meaningful source of advertising-based revenue.”

A recent CNET poll confirmed McKraken’s findings. Out of 2140 CNET online viewers, only 30% could remember seeing any type of televsion ad for an Apple product in the past year, and virtually all of those promoted Apple’s iPod brand of music player. There has not been a PowerMac, Powerbook, or iBook television commercial for over 3 years, and Apple’s eMac, Mac mini, and X-serve lines have never been advertised outside of posters in it’s Apple retail stores.

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“The iPod ads are a bit of an anomaly,” McKraken explains, “and a rare spending spree for Apple. Eleven of the “silhouette” ads were shot over a 3-Day weekend last January (Martin Luther King Jr. Day) by the son of one of Apple’s educational sales V.P.s and his friends. Apple bought all 11 of the commercials from the teens for (US)$860. Unfortunately, Apple marketing execs “assumed” the kids had cleared the rights to use all the music featured in the ads, and Apple was promptly sued by Eminem (among others).

“It would appear Apple can either spend its advertising budget on lawyers to combat the rumor sites, or on producing expensive commercials and television ads. ” concludes McKraken. “In our eyes, it seems more financially prudent for Apple to let the rumor sites do the heavy lifting.”

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