A leading Wall Street analyst expects 100 million Windows users to own iPods by 2008.

In a 27-page note released to clients, Needham & Co. analyst Charles Wolf revealed that, when such critical mass is achieved, "Mac sales could surge if only a nominal fraction of this group make a purchase."

While Apple has remained tight-lipped concerning claims that it intends releasing a flash-based iPod, Wolf says: "Although we expect hard drive players to capture an increasing share of the portable music player market, flash players should dominate the market through 2006."

iPod leads the action

He describes such a possible product introduction as, "an opportunistic move to quickly capture an even higher share of the portable music player market". Apple has already established the iPod as the "leading brand" in the portable music player market, Wolf affirms.

The analyst estimates Apple's iPod to be worth $25 on every company share, and states: "Apple, excluding the iPod, should be valued at $37 per share". He raised his target price on Apple stock to $62.

The Apple valuation also includes the company $13 per share hoard of cash, without which Apple would be worth $24 per share - one dollar less than iPod business itself, his estimates reveal.

On Tuesday, analysts at Fulcrum Global Partners and Piper Jaffray both raised their target prices on the company stock, to $65 and $100 respectively. Both assess the stock as a 'Buy'.

Conservative assessments

Wolf's analysis and raised target price are not dependent on an iPod halo effect, nor on Apple maintaining an 80 per cent share in the hard drive-based music player market and 70 per cent of the music download market. Nor does it depend on any future iPod flash product release.

Wolf also describes Apple's online and brick-&-mortar retail stores as "the unsung heroes of the Apple story".

In fact, Wolf's account relies on the assumption that a truly competitive product will debut on the market, and that Apple's share will slide to 60 per cent. He predicts that Apple will be able to compete with that future challenge on price, because it will be able to benefit from economies of scale, attracting lower production costs than competitors can access, due to iPod's massive sales volume.

Signs and portents

Examples to illustrate the significant impact production cost savings could make on Apple's performance already exist, Wolf maintains. Referring to iPod mini he writes: "Hitachi initially experienced quite low yields in its production of the drive used in the iPod mini. Low yields add to manufacturing costs in two ways. They not only prevent the fixed costs allocated to each drive from falling but also require defective drives to be reworked or scrapped."

Drive production costs decline as yields increase, because overheads are spread across more units. He suggests that iPod mini drive production costs could now have fallen by a third, speculating that, "Apple should have sufficient margin to reduce the price of the mini from $249 to $199, "once supply catches up with demand".

PC installation on the rise

Wolf estimates that the installed base of personal computers could reach 1.3 billion by 2010. And he believes that, since a PC is required to use an iPod or other music player, such continued consumer take-up will propel sales.

"Our analysis indicates that the installed base of portable music players could approach 500 million by 2010, equivalent to a 7 per cent penetration rate of the worlds population."

The Microsoft choice 'ignores reality'

Microsoft argues that consumers want choice in their online music purchases, and will eventually favour non-Apple devices. Wolf declares that the Redmond company's assessment, "ignores reality".

Wolf does not believe music lovers care about music formats when they buy songs, and that most songs are ripped from CDs or downloaded elsewhere. He argues that consumers don't care which online service they use, as long as it has what they want and is compatible with their device, and adds that content will not drive a single standard service to emerge, as music content will be identically-available on multiple services.

"There are no compelling economic reasons why Microsoft’s Windows Media Audio music software platform should end up dominating this market just because it’s been adopted by a host of online music stores and music players", he writes.

"In our opinion, the only way Windows Media could emerge as the dominant platform is if Apple stops innovating its iTunes software and the iPod," he states.

Simply the best

Wolf's extensive report carries a plethora of insight, and the note of caution is double-edged.

"We believe the iPod will lose some market share only because its share is so high. Apple has been successful in fending off competitors to date because most have been inept at designing easy-to-use players. Eventually, however, one or more are likely to enter the market with competitive products. In our opinion, Sony has the best chance of challenging the iPod because it has a compelling history of innovation."

He predicts that by 2010, iTunes Music Store market share will have fallen to just 2 per cent, but points out that this figure equates to sales worth $800 million per year by then.

Next year's outlook remains positive, too, Wolf writes: "We’ve adjusted our fiscal 2005 revenue model to incorporate iPod sales of 13.3 million units, up from 9.5 million previously. We’ve also raised our forecast of peripheral, software and music sales."

Confirming that Apple has successfully transformed itself into a $10 billion company again, Needham & Co presently predicts Apple to reach 2005 revenues of $11.7 billion, up from the $10.2 previously assessed.

"We’re forecasting iPod sales of 23.5 million units in 2006," Wolf adds.