Apple Looks to Compete in Video

The high video recording capacity of the newly launched Apple (AAPL) iPhone 3GS may come as a potential threat to manufacturers of low-cost camcorders. The phone comes with a 3 mega-pixel camera that enables high-quality VGA video recording in portrait or landscape, which can be edited on the phone itself and shared instantly through email, uploaded to YouTube or transferred to laptops.

We believe that Apple's iPhone 3GS, with its video recording capabilities, may have a negative impact on camcorder manufacturers. This apart, the company is also planning to include a camera with video recording capabilities to its "iPod Touch" series. The iPhone 3GS camera module is expected to be compatible with iPod Touch. At about $9.50, the module might add a tad to the price of iPod Touch but won’t make the product uncompetitive.

The iPod touch with enhanced video features would have a negative effect on sales of entry-level camcorders. This apart, both iPhone 3GS and iPod Touch are available with 32 GB storage capacity, which is the same as the hard disc storage capacity available with the camcorders.

We feel camcorder manufacturers, like Sony (SNE), Panasonic (PC), Canon (CAJ) and Flip, have to worry about their low-end models as multitasking capabilities and enhanced video capturing features make iPhone 3GS and iPod Touch better options than normal camcorders.

Although Apple provided a cautious outlook for 3Q09, a recent price cut of its current generation iPhone 3G is expected to drive sales volume. The company continues to take market share with its Macintosh and smartphones. We expect Apple to trade at a large premium to its peers. We maintain a Hold rating on AAPL shares.

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