Managing Essentials

International Apple Inc.: The trillion dollar baby?

For quite some time now the market value of Apple has overtaken companies like Exxon, General Electric, and Microsoft setting a new record in August this year. With a worth of US$ 623.5 bn Apple became the most valuable USA company ever, a position held since 1999 by Microsoft, shortly before the dotcom bubble busted one is tempted to add. Analysts continue to see Apple's future in a bright light and, as Benjamin Pimentel in Marketwatch summarizes, some of them already have a new record in sight, Apple as the first company to be worth a trillion US$. There is no evident reason for this continued advancement during the last few months. Apple neither introduced a new barrier breaking product nor did it announce positively surprising financial data. Also an optimistic perspective in the court case against rival Samsung could be ruled out. Apple was rewarded US$ 1 bn. But even if, against most odds, Apple would have received every cent of the US$ 2.5 bn it had demanded from Samsung, the sum would be peanuts in the balance sheets of the company. Yes, the iPhone 5 will be introduced soon but even the most devoted enthusiasts expect no revolutionary new features. Already the voice control, which was the main update of the iPhone 4, could hardly be labeled revolutionary and while progress has been made in the twenty years of attempts to put voice control in use for computers, results are not too convincing. Pointing, clicking and typing are still the most efficient and reliable ways to communicate with a computer. If one looks for internal reasons for Apples high valuation some rather more conservative indicators stand out. Firstly, the company floats on money. In contrast to many other hi-tech companies it now pays a dividend, but cash reserves alone currently exceed US$ 100 bn. Secondly, the company has a firm grip on at least one of its markets, the tablet PCs. Apple invented this market with the iPad just two years ago and three out of four tablets sold bear the Apple logo. Thirdly, like the iPad all other products of Apple are very profitable with an overall margin for the company of about 30%. Finally, Apple has a proven history of inventions and the ability to market them. Stock markets are believed to act on and price in expectations, but to see the company as the trillion dollar baby means to write on history. The history of Apple invites us to do just that. The company has also lived through less rosy times; it has not just survived but reached new heights after each crisis, last time with the iPad coming when the iPod reached the end of its life cycle. Regarding the products, enthusiasts always backed the company and its former chairman despite, and maybe because of all the problems encountered. In addition, Apple never disappointed in the way that recent investment alternatives have done. Facebook, Groupon and Zynga are not exceptional when it comes to the losses which investments in these industries can bring around, but the hype about and subsequent rapid fall of Facebook has frightened many investors. Apple creates hard technological products with a track record of sound business models, not fragile income from social relations in

Managing Essentials
International
some yet to be discovered forms. Technological leadership and a sound business model also characterize the second winner in the hi-tech stock market, Google. As Sam Gustin argues in TIME Magazine, an explanation of the recent successes on the stock markets of both Apple and Google may be just a lack of alternatives. The fall of Facebook has shaken the confidence in analysts and raised the awareness that privileged market participants may make their deals on the shoulders of those coming later or being less informed. With this background in the fast changing high-tech world, Apple and Google come close to old titans having weathered many storms. Their cash reserves appear as the fat which will allow them to survive in hard conditions by buying out competition and innovating their product lines. It remains to be seen whether or not the analysts seeing Apple become the trillion dollar baby have reflective holidays like some of those who recently endorsed Facebook, but there are many signs that Apple will have to prove its strength on many fronts. The jungle of legal cases to protect products and market shares, pertinently visualized in an article by Adam Thierer in FORBES, is the obvious sign that competition is catching up with an eye on the high profit margins. In some areas Apple has already been overtaken. While the iPhone made the headlines for design and functionality, the real silent winner of market shares in the last years is Googles Android operating system suggesting Steve Job's heated opposition to Android had a valid reason. Already the discussion about the conditions under which its products are manufactured in China took a bite on Apples image, but the ongoing legal battle and its growing publicity can start to shake the base of the Apple culture. Also observers friendly to the company have doubts about Apples arguments and see what Apple understands as protection of its intellectual property, as an attempt to stifle competition and monopolize technological progress. In addition, the policy of introducing a new model every year starts to draw criticism. The product launching policy begins to be perceived as driven more by marketing efforts than by real innovation. In fact it is a question of perception and taste if a model is really outdated when core functionalities do not differ. To fit new models with genuine and important new features is sometimes close to impossible. It would be detrimental to its reputation however if Apple became a fashion company playing with naive customers instead of a genuine high-tech and design leader. Appeals to invest more of its abundant cash into research and development like the one by Brian Love in the San Francisco Chronicle have an ironic and worrying undertone addressed to a company famed for innovations. The money amassed expresses a good business model for some, for others it indicates a lack of further good ideas in which to invest. For a long time loyal customers tolerated some of the idiosyncrasies of Apple being a closed shop and a friendly dictator relating to its products and applications whilst present in a world of open systems and freedom. This tolerance was due to the charisma of Steve Jobs.

Managing Essentials
International
His company seemed to need some secrecy to create its technological miracles and beautiful designs. Once a year, the public was presented with the results of the wizards mysterious workshop. This minimal marketing was always admired, but it appeared only of secondary importance. If these priorities change in the eyes of the customer and Apple becomes more famous for its marketing than for its products, the future looks much less bright. One cannot but sympathize with Apple. Its history and founder are an integral part of our technological history over the last decades with all the ups and downs. Apple toppled Microsoft in company valuation, now it has taken over the crown of the most valuable company ever. For the observer these are highlights of an epic battle, but of course the actors should not fall prey to their own saga or they will become but history. Apple reached a peak and, as so often in its history reaches a crossroad. Just to sell more and slightly advanced iPhones and iPads is not a business strategy to secure the companys current position into the future. New innovative products expressing technological leadership are needed. Facebook and RIM, producer of the not long ago famed and must have Blackberry phone, have shown in the last few months that companies can fall fast and deep if they start to believe that a good story and the marketing department is more important than the top position in the product lines with regard to functionality and usability.
Apple seen as trillion-dollar baby: Analysts say tech giant has momentum and growth opportunities (Benjamin Pimentel) www.managing-essentials.com/2ix Why Wall Street Loves Apple and Google as Facebook and Friends Flail (Sam Gustin) www.managing-essentials.com/2iy Regulatory, Anti-Trust and Disruptive Risks Threaten Apple's Empire (Adam Thierer) www.managing-essentials.com/2iz Apple, Google - please spend on R&D not IP (Brian Love) www.managing-essentials.com/2i1