PortalPlayer, the company that designs the chips and software for the iPod, doesn't have a long-term contract with Apple, leading analysts to caution investors in the run up to the company's IPO.
The company, which filed to go public back in August, currently has a short-term contract with Apple and is producing chip designs on a purchase-order basis.
PortalPlayer is up front about the risks. In the filing it states: "We currently depend on one customer [Apple] for a high percentage of revenue and the loss of...this customer would significantly reduce our revenue and adversely impact our operating results."
Analysts are also concerned that while PortalPlayer's technology is innovative, and the iPod popular, the business of designing semiconductor chips isn't secure – and the competition is building. There are also concerns that the company may have trouble protecting its intellectual property.
Mine, all mine
BusinessWeek reports that industry watchers say Apple zealously guards the intellectual property around its devices. "That could make it harder for PortalPlayer to capitalize on the iPods' success and diversify its revenue stream".
Peter Glaskowsky, the chief systems architect for chip-builder MemoryLogix said: "Long-term success [in the chip business] requires building a library of intellectual property. I don't know what, if any, IP is held by PortalPlayer. Their music-player chips are all based on industry standards that PortalPlayer doesn't control."
Another reason for caution noted by analysts is the mounting competition from Sigmatel, Telechips, and even chip giant Intel could lead to competing offerings down the road, explains BusinessWeek. However, the report notes: "Chip experts say it would be difficult for Apple to throw over PortalPlayer for a competitor, a move that would entail rebuilding iPod's innards virtually from scratch".
The fact that PortalPlayer has not yet turned a profit is also a cause for concern. The outfit expects to lose $5 million in 2004. Some analysts note that this is strange considering how well the iPod is selling, leading to suggestions that maybe Apple is paying very little for use of the chip design. Tom Taulli, an IPO expert with Currentofferings.com, said: "I would think that they should be closer to profitability than they are."