NEW YORK (CNN/Money) -
Digital music players are likely to be one of the hottest selling tech gadgets this holiday shopping season. And no company should benefit more than Apple.
Apple's iPod music player has been a huge success. Apple sold 336,000 iPods in its fiscal fourth quarter (which ended in September), generating $121 million in revenue, or 7 percent of Apple's total sales -- more than twice last year's levels.
"I notice a lot of people walking around with white headphones," said Bill Fearnley, Jr., an analyst with FTN Midwest Research, referring to the signature look of the iPod headphones.
In addition, Apple's iTunes is the top source for legal music downloads. As of early November, 17 million songs had been sold (for 99 cents each) since the service debuted in April. The service is now also available for users of PCs running on Microsoft's Windows.
The hoopla surrounding iPod and iTunes are clearly two big reasons behind Apple's strong stock performance during the past few months. Shares of Apple (AAPL: Research, Estimates) have risen nearly 50 percent this year. But heading into the crucial holiday season, Apple now faces a lot more competition than it did just a few months ago.
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Napster, which was relaunched by Roxio (ROXI: Research, Estimates) as a paid online music site last month, sold more than 300,000 songs in its first week.
Rio and Creative Labs have introduced new versions of their Nitrus and Nomad MP3 players. Korean consumer electronics giant Samsung is offering a music player that will have the Napster brand name on it. And Dell unveiled its own music-playing device called the Dell DJ and announced a partnership with online music store Musicmatch last month.
Despite this, tech industry analysts don't see Apple losing its edge in this market any time soon. Peter Kastner, chief research officer with Aberdeen Group, said that favorable product reviews and advertising have created tremendous brand awareness for the iPod.
"I don't see any loss of momentum for Apple," Kastner said. "Our research shows that people are coming into stores and asking for the iPod by name, not just any music player."
One possible negative for Apple this holiday season is price. For example, the 10 gigabyte (GB) version of the iPod (which holds about 2,500 songs) costs $299, according to Apple's Web site while the 20 GB version sells for $399. Dell, however, has a 15 GB version of its DJ that costs $249 and its 20 GB version sells for $299. And Creative's 30 GB Nomad Zen NX sells for $299 as well.
Stan Ng, senior product manager for the iPod at Apple, said that the company would love to lower the price of the iPod but that it isn't feasible, especially since Apple is adding new features that consumers want. For example, the latest version of the iPod includes a voice recorder and the ability to transfer photos from a digital camera to the iPod.
"We are always looking at prices and the competition but what's interesting about the competition is how people review their products and call them iPod killers. It's nice to be held up as the gold standard for digital music players," said Ng.
To that end, Stephen Baker, a consumer technology analyst with NPD Group, does not think that lower-priced products will necessarily make a dent. He said that the iPod is still acknowledged as having the best features and design and thinks that consumers will pay up for that. Dell, on the other hand, is known more for lower price points, and not necessarily product innovation.
"In every tech category there are always mainstream and premium products. Is Dell's DJ a threat to Apple and the iPod? I don't think so. It's much more a threat for the likes of Rio and Samsung," Baker said.
A video iPod next?
So what's next for Apple in the consumer electronics area? Currently, the only other device of note that Apple sells is its iSight web camera, which Ng said Apple expects to be a strong seller during the holiday season.
Apple's main hardware rivals, Dell, Hewlett-Packard and Gateway, are all making bolder pushes into the consumer electronics area, branching out into things like flat-screen televisions, for example. But Apple probably will not go that route.
Baker said that he would not be surprised to see Apple eventually launch a video version of the iPod that could run on Apple's QuickTime media playing software. He also said that a TiVo-like digital video recorder could make sense.
Aberdeen's Kastner also thinks that a video version of the iPod is likely, especially since Microsoft has announced plans to start selling audio and video playing software for mobile devices, called Portable Media Center, next year.
But Kastner said that something that could really be a big success for Apple would be transforming the iPod into a smartphone, a combination cell phone and personal digital assistant. "That's something that people are rumoring. An Apple smartphone would fit in a new product category, where industry standards have not been set," Kastner said.
Ng would not comment on speculation about new products but he did say that for now, Apple is squarely focused on music.
"It's flattering to hear people talking about adding functionality," Ng said. "But the main goal of the iPod is being the best music player on the market. Music is an area that Apple wants to be a leader in."