iPod refresh on the horizon; the Facetime network effect. Apple (Buy, $241.62) will hold a special event on September 1st where we expect Steve Jobs to refresh the iPod lineup and possibly highlight new features in Apple TV / content deals. Traditionally, the September event is music focused and we expect the entire iPod lineup to be refreshed with capacity upgrades/new functionality. Specifically, we believe the new iPod Touch is likely to contain multiple cameras and be Facetime enabled while the nano/shuffle could have a touch screen. We expect the new iPod portfolio to be available shortly after the event, which should spur incremental unit demand, positive product mix (towards higher-end iPod Touch) and support results in the September quarter (DB at 9.5M iPods). Perhaps more importantly, we expect Apple to reveal the next step in broadening the availability of its Facetime app. As highlighted below, we estimate that the size of the iPhone Facetime network alone will grow to ~6,000Bln unique possible connections (~100Mln+ users) by the end of 2012. If Apple extends Facetime to other HW platforms (iPad, iTouch, Mac) over the course of the next year, we estimate the Facetime network would be ~4x larger at 25,000Bln (225Mln+ installed base) in the same period. We believe Apple is acutely aware of the power of networks and is applying this concept to accelerate adoption of its platform. Facetime not only adds to the many features that makes Apple’s current product offering the strongest in its history, but it also has the potential to increase the stickiness of the platform exponentially. Reiterate Buy and $375 PT.
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