Report of Swelling iPod Inventory Hurts Apple

Shares of Apple Computer Inc. (AAPL) fell 5 percent Friday, fueled by an Internet report of swelling inventory of its iPod digital music players.

The decline came after (search), a web site that discusses issues related to the company's products, said Apple is "overstocked on most iPod (search) models with about a month remaining in its third fiscal quarter." The report cited unnamed sources.

"Apple is believed to be sitting on its most significant inventory of iPod Shuffles since the player hit the market in February," the web site said. "According to reliable sources of information, tens of thousands of iPod shuffles remain idle in the channels this week alongside a good number of iPod photos."

Apple's iPod Shuffles (search) are the least expensive in the iPod line, selling as low as $99.

Representatives for Cupertino, Calif.-based Apple were not immediately available to comment Friday.

Piper Jaffray analyst Gene Munster said that growing iPod supplies are not surprising since the company did not introduce any new products during the quarter, and inventory caught up to slowing demand for the gadgets, which dominate the digital music market and are one of Apple's biggest revenue drivers.

"I think (the web report) is right; there is inventory there, and we are only looking for a flat quarter" for iPod unit shipments compared with the period ending in March, he said. "But (Apple's) quarter is going to be fine. There will be an upside to revenue and more upside to earnings."

Apple's shares slipped $2.02 to $38.01 in Nasdaq trade.

Separately, Apple late Thursday said it agreed to extend warranties and issue credits to consumers who had battery problems with older versions of the iPod.

Piper Jaffray's Munster said the ruling was insignificant, since it is likely that many of the $50 credit vouchers awarded to consumers will not be used. What's more, the credit must be used to buy more Apple products, which could inspire additional sales of other electronics.

Apple is the No. 1 seller of portable digital music players -- often called MP3 players -- that let users carry thousands of songs on a device smaller than a wallet. In Apple's most recent quarter, its sold 5.31 million iPods, accounting for 31 percent of the company's revenue.