Apple will decline after Steve Jobs…

… but they would have declined (or at least slowed in growth) anyway.

A lot of the value in Apple has come from the ineptitude of other companies and the passion and willingness of early adopters to spend huge money. There are inherent limits to growth fueled by those two factors. For example, the early adopters with the greatest willingness to pay for smartphones (and associated service) have already purchased smartphones. Now the big market is from people in emerging countries, such as China, and the average consumer in developed countries. The record companies were so poorly managed that they gave up 30 percent of their digital music revenue because they were too lazy to run their own Web site. What other industry is going to give Apple 30 percent of its revenue in exchange for Apple running a server?

So let’s not be too hard on the new Apple CEO (Tim Cook, who seems to be more experienced with logistics than product design). If revenue and profit growth flattens it might well have done the same under Steve Jobs. For Apple to justify a comparable market cap to Exxon’s (which owns oil wells, after all) would require a lot of things to go right over the next decade. The current P/E ratio of 15 doesn’t look that high, but since Apple is a tech company that issues a lot of stock options they may end up diluting current investors so much that a public holder of a share of Apple stock may never receive his or her full $383 worth in dividends and capital gains.

19 Comments

  1. michael

    August 27, 2011 @ 2:39 pm

    1

    Those are good points. But does P/E ratio account for $60 Billion in cash and zero debt? I am not a finance guy so I am ignorant, but I think that means something.

    Also, I think the people that already bought iPhone smartphones because they are early adopters will also buy the next model iPhone too. It’s not like they are out of the market. They just give the old one to a family member and expand the iOS market. Plus, Apple is moving down the market toward the low end as they deprecate models. And it’s not just Apple fanboys who have iPhones. If you go into an Apple retail store, they are packed with every demographic from 5-95 years old.

    I never thought mac products were overpriced, since I used them to make money and I value my time. And I have always seen analysis where macs have lower TCO versus PC, which I personally anecdotally believe.
    I work at a the second best university in my hometown of Cambridge and my IT support department attributes 68 hours wasted PER support staff person in the first four months of this year dealing just with PC virus problems.

    I am not a stock guy ( I did buy Apple at 185 when the iPad came out because I was shocked at the bad reviews…) but I think Apple could double or triple in price in a few years just from all the new markets segments overseas and domestic that it will just plow through on momentum alone.

    Also your point about the music industry is off I think. Since you are extremely intelligent, you assume others are too and undervalue your own skills. Laziness is not the reason the music industry couldn’t run their own websites. Fact: half the people a person meets are below average intelligence. In your case the vast majority of people you meet are less intelligent than you.

    Is there a way to find out how many options Apple has issued? Is that publicly disclosed? and how does the dilution happen if there is no capital paid in? Sounds like it should be illegal if a company can spontaneously issue shares and dilute current shareholders stock value. Please explain in layman’s terms if you have the time. Thank you.

  2. michael

    August 27, 2011 @ 2:45 pm

    2

    edit: maybe it was 195 when I bought it, I don’t remember exactly.

  3. David Hamilton

    August 27, 2011 @ 3:24 pm

    3

    In considering Apple’s future, it is clear that there will be two distinct phases: The first involves execution of the current products, and their immediate derivatives. Since Tim Cook has been key to creating the economies of scale that powered Apple’s recent profits, it is reasonable to expect that these will continue unabated. So I think you’re wrong for phase one.

    The second involves the creation of new products. Under Jobs this entailed making the best product possible, regardless of whether it disrupted sales of Apple’s existing range, and they’ll need to continue that. Also, the post-Jobs Apple will have to remain as good at saying no to the distractions of possible sidelines. This second phase will be the test, but they do still have Jony Ive, so designing good new products will not be the problem.

    I’m pretty convinced that the success of Apple ‘2.0’ was due to the combination of those three people: Jobs, Cook and Ive, and not purely Jobs. Jobs in many ways can be seen as an enabler, and Cook and Ive will be able to continue extremely effectively in the roles that they have.

  4. rj

    August 27, 2011 @ 4:23 pm

    4

    “What other industry is going to give Apple 30 percent of its revenue in exchange for Apple running a server?”

    So far, it appears that the software, ebooks, emagazine, tv and movie industries will, to varying degrees.

  5. Geoff

    August 27, 2011 @ 4:24 pm

  6. Chris Jones

    August 27, 2011 @ 5:38 pm

    6

    You say “people in emerging countries, such as China” as if that means that they are all unable to afford iPhones.
    If you look at Apple’s growth in the last year in Asia, and the growth of the middle and upper classes in China, it seems far more likely that Apple will be able to cater to the richer end of their economy just as it has in Europe and the US. The difference being that we are nearly tapped out and they are still growing.

    Also, I think Apple products, particularly the iPhone, have truly crossed the chasm from early adopters to broader user bases. I live in London and I see iPhones *everywhere*, with no obvious stereotypical indication of them being techie early adopters.

    Having said that, Apple will decline at some point just because every company always does. It may well be that they have peaked already, or it may be that Steve’s relentless drive and sense of his own decline have stocked the pipeline with excellent products for much of this decade.

  7. philg

    August 27, 2011 @ 5:48 pm

    7

    Chris: I did not mean to suggest that people in China won’t buy iPhones. Of course they do and will continue to do so. However, robust demand from China’s wealthier consumers is already priced into Apple stock. The stock won’t go up if these people continue to buy iPhones because investors currently assume that those China sales will be very strong and growing.

  8. DT

    August 27, 2011 @ 6:55 pm

    8

    “What other industry is going to give Apple 30 percent of its revenue in exchange for Apple running a server?”

    It’s not the server, it’s the device used for consumption. Apple won the music server contracts by developing the easiest to use player. Likewise they’re winning the contracts for other media thanks to the iPhone and iPad.

    The only media related companies who have realized this and even tried to do something about it are Amazon and B&N.

  9. Ram C Singh

    August 27, 2011 @ 7:00 pm

    9

    Apple will likely decline in the future, but not for the reasons you list, Mr Greenspun. Very little of Apple’s profits come from content. Apple does those content deals in order to provide a better overall user-experience to the purchasers of its *technology*. It’s the margins on that tech that provides Apple with most of its profits.

    So, what about that tech? Apple has been able to maintain high profitability on all of its hardware, throughout it’s history. It does so by not participating in a race-to-the-bottom with respect to pricing. It does this by providing value to the consumer that is greater than the sum of the parts. We know the story. Apple didn’t invent the personal computer. It just made computers that were accessible to a broader audience, first with the Apple I & Apple II, then with the Mac. Apple didn’t invent the MP3 player. It just made one incredibly that was incredibly easy to use, and paired it with a service that made it incredibly easy for non-techies to download new music. Apple didn’t invent the smartphone… didn’t invent the app store… didn’t invent the tablet computer… etc…. etc… So, the idea that Apple products only appeal to “early adopters” is ludicrous. Early adopters are the type of people who see cool tech, and figure out how to make it work for them. This is not Apple’s market. Never has been. From the beginning, Apple has been company that works hard to figure out how to make tech accessible to people. Google “Steve Jobs” and “bicycle for our minds”, if this is not clear to you that this is true.

    So, why could Apple decline, if not for, as your suppositions of a limited early adopter market or shrinking margins on content?

    Depending on how one tallies, Apple has been through three successful major technology and business transitions, combined with three minor ones within the Mac family, and two minor ones within the iOS family: Apple II > Mac [Mac (68K) > Mac (PowerPC) > Mac (OS X)] > Mac (Intel)] > handhelds [iPod > iTouch(iOS) > iPhone (iOS) > iPad (iOS)]. Combine that with the development of new business/sales platforms (virtual Apple Store, physical Apple Stores, iTunes, App Store, etc.) that enhance the consumers’ Apple experience. Each one of these required the insight to recognize a particular opportunity (and the discipline to ignore others), the investment of resources to develop those opportunities, and wherewithal to follow through on the execution, even if that means cannibalizing from the sales of incumbent products. Without these pivots, Apple would not be in dominating position it is in today.

    Consider that companies successful over a long duration are able to execute strategic pivots when required. This happens more frequently for tech companies that those in other industries. IBM is an example of a tech company that has done so at least four times over its long, 100+ year old history. Apple has done three within 30 years. HP is at the beginning of one now. Exxon hasn’t had to do a major strategic pivot since it’s days as Standard Oil. It will be interesting to see, if when the time comes, they will be able to.

    What is the one link between Apple’s major initiatives? They all occurred while Steve Jobs was in a position where he could significantly influence Apple. It is interesting to note that two significant new Apple tech platforms that failed – the Apple III and Newton – and the one significant new Apple business platform that failed – licensing Mac clones – were not initiatives that Jobs was affiliated with. (Before moving on, let’s acknowledge that the Lisa failed under Jobs’ purview, and that the 68K > PowerPC transition was successful carried out during his absence,)

    We see how Apple’s success if predicated on an ability to pivot to address new opportunities in the market, even if those opportunities cannibalize an existing profit center. Jobs’ value to Apple extends beyond being a visionary, design auteur, or talented business negotiator. None of those things would have meaning if he didn’t also have the force of personality and strength of credibility to compel dramatic changes within Apple.

    So, then, the question becomes, who can fill in for Jobs in this capacity? If no one can, Apple is very likely to decline, much as Sony has in the post-Morita era.

  10. Wolfgang Amadeus Godzilla

    August 27, 2011 @ 10:10 pm

    10

    Every successful tech company has succeeded because its competitors were laughably incompetent.

    Apple’s success depends on Jony Ive (or somebody) mastering the perfectionist “chief editor” role that Jobs has had in product development. He’s doing it at least to some degree already; we’ll see if he can be the buck-stops-here guy without a net.

    Apple’s success also depends on Tim Cook staying the hell out of product development. He won’t. Tech generally companies succeed only if they’re run by guys from the field the company excels in. Microsoft, Hewlett-Packard, etc. etc.

    Under Jobs, Apple was about the thing that Jobs understood and loved: Product development. Under Bill gates, Microsoft was about software. Under a business guy, you’re doomed, because a tech business is not about business, it’s about technology.

    Tim Cook is a business guy. Apple is dead. Quote me.

  11. Wolfgang Amadeus Godzilla

    August 27, 2011 @ 10:13 pm

    11

    Of course, if Ive isn’t CEO material, they’d’ve been doomed anyway. The hellish temptation to make a business guy the CEO is that he has the skills a CEO seems to need, and the tech guys generally don’t. But the CEO can delegate all that crap. The one thing the CEO can’t delegate is what he thinks is important and what he understands.

  12. Mark Lutton

    August 28, 2011 @ 12:26 pm

    12

    Apple fails, then succeeds, or in some cases fails, then fails, then succeeds.

    Example of the first: the Newton, then iOS. The second: the Apple III, then Lisa, then Macintosh.

    Sometimes it gets it right the first time, like the LaserWriter. Who knows how many pre-LaserWriter printer projects failed inside the company?

    A small start-up one-project company develops its product in public, more or less, and at some point must show its work. The only way it can bury its failure is by going out of business, or starting from zero on another project. A successful product is the result of many companies working; one succeeds and the rest fail.

    Apple can afford to have many projects going on. Only a few will see the light of day but those few will be things like the Macintosh, the LaserWriter and the iPhone.

    Consider just the iPhone. This is primarily a full-featured computer: a Newton with a music synthesizer, a camera, a microphone and speaker, a music and video player, an accelerometer and a compass, WiFi, and oh yes a cellular modem/telephone so you can get data and make phone calls over the cellular network. The best existing market is for telephones — people were already buying telephones but didn’t think they needed pocket computers — so it is marketed as a telephone.

    Interesting: read Kurt Vonnegut’s “Galapagos” (written in the late 1980’s). A character invents a pocket computer that is EVERYTHING the iPhone is EXCEPT a telephone or camera or music and video player. It could translate languages and diagnose medical conditions. We don’t get to find out how marketable it is because everyone in the world dies except for a few people stranded on an island, but I would guess that it would have been no more successful than the Newton. Point is, not even the science-fiction writers guessed that one little device would be your telephone AND your music player AND your still-picture camera AND your video camera and oh by the way it translates languages and you can look up words and medical conditions and see the weather map. Even the Star Trek Tricorder falls far short — and why did the Star Trek characters have TWO things, a Tricorder and a Communicator, instead of both in one? Because nobody thought of it, that’s why.

    Five years from now you’ll be using some new Apple product that you aren’t even imagining yet. Unless people like W.A.G. above are right and the new guy runs the company as if it’s about to go bankrupt and needs to be turned around.

  13. philg

    August 28, 2011 @ 1:03 pm

    13

    Mark: “Five years from now you’ll be using some new Apple product that you aren’t even imagining yet.” That’s also true of BMW (1/10th the market cap of Apple) and just about every other company that makes consumer products. The capacity to innovate is already priced into Apple stock, just as it is into BMW’s, and does not have infinite value. Since Apple has been very successful in the past, the stock price reflects investors’ estimate that they will be very successful in the future. So where another company might get a huge lift in value from a new product launch, for Apple it will already have been priced in. By contrast, a failed product launch could bring Apple’s perceived value down.

    (The stock price, of course, could still go up if Apple decides to retain earnings or do stock buy-backs rather than pay dividends.)

  14. Fabian Gonzales

    August 28, 2011 @ 1:06 pm

    14

    Exactly!

    Just in order to stand still, Apple will have to keep innovating. The iPod (& iTunes) was a great idea brilliantly executed. And so was the iPhone. The iPad… noo so much. But iPod sales are long declining, partly cannibalized by iPhone sales. And the iPhone now has massive competition. How many more rabbits can Apple pull out of the hat? I called the peak of Apple’s success when they released the iPad, and I still think I wasn’t too far off.

    Also, the 30% markup Apple gets on music and apps sales will erode. It is going to be very hard for apple to defend those kind of margins over longer period of time, as competitors catch up.

    I still kick myself for not buying Apple when it was $8, shortly after Jobs rejoined. I was thinking at the time that Jobs would turn Apple around, but was too timid to buy stock in the flagging company. Live and learn I guess. But at $383, when it is already the world’s most highly valued corporation, there are likely better opportunities elsewhere.

  15. rj

    August 29, 2011 @ 12:18 am

    15

    “The capacity to innovate is already priced into Apple stock, just as it is into BMW’s, and does not have infinite value. Since Apple has been very successful in the past, the stock price reflects investors’ estimate that they will be very successful in the future.”

    You could have made the same argument a year ago, or prior to the iPad or prior to the iPhone. And every time, you would have been badly wrong. That said, an open-ended “Apple will decline” prediction will be right, eventually.

  16. stand mixer reviews

    August 30, 2011 @ 10:45 am

    16

    The return of Steve Jobs to Apple has helped to instill a change in the attitude of the employees. This attitude has resulted in the recent new products that Apple has introduced. This attitude will not completely dissipate when Steve Jobs is gone. It might wane a bit but it will not go away.

  17. Mark Lutton

    August 30, 2011 @ 11:20 pm

    17

    Phil, the BMW you buy today is no different from a 1981 BMW. You put fuel in it and drive it places as you listen to the radio in air-conditioned comfort.

    Your iPhone wasn’t even imagined in 1981. I challenge you to find a description of an iPhone in any science fiction before 1990. Even Kurt Vonnegut’s Mandarax (or whatever it was called) couldn’t make phone calls, and Star Trek communicators couldn’t play music.

    I’ll believe BMW is an innovative company when I can buy one that can extricate itself from a New York City traffic jam in five minutes.

  18. So?

    August 31, 2011 @ 5:44 am

    18

    There is a Russian sci-fi story from 1958 which described an “iPhone” to a T.

  19. Anthony

    September 1, 2011 @ 11:49 am

    19

    You are brilliant but you have blind spots in this topic, much like Apple’s competitors. The iTunes music store was not just some server. It needed to compete with Free. Apple needed to create an end to end solution that got all the little details right. This allowed purchasing music to be so easy that people would consider it over stealing it. The fact that you see the iTunes store as just a server is what makes you different from normal consumers and similar to Apple competitors. The details matter to Apple. Apple makes sure it polished and working well before it is released. Other tech companies do not seem to have that in their DNA, which leads to releasing half-baked products.

    The reason that Apple has been able to grow so quickly is that it continues to create new markets, instead of defending its old markets. Microsoft became extremely successful becoming the dominate player in the PC business. It spent years then defending that success instead of creating innovative products that might threaten it most successful business. Microsoft made Internet Explorer to defend Windows for being marginalized but then let it stagnate. It tried to slow web applications and was blind that it would be the platform for all the next big developments. In the Road Ahead, Gates still didn’t think the Internet would be a big deal in 95! Microsoft still sees tablets as just PCs. Google has done everything to defend it advertising business. Apple seems to be the only large company that can create the next big thing that will cut into its old business. Another PC company would never have created an iPad. Normally, a company would have resisted add a music player to the iPhone to protect its iPod market. Decisions like this lead to a mediocre product. Most companies reward employee that protect their original successful product and they become blind to a future where the success product is not important.

    Your ideas for why Apple is successful are wrong. The iPhone and iPad are well past the early adopter’s market. Also, iPad is not too expansive; it is cheaper than most of its competitors. Tim Cook and the logistics that you undermine are the reason that Apple products are higher quality AND cheaper. Apple has consistently lower the price of products to reach new markets. A perfect example of this is the iPod; it started as a high-end product spun off lower-end options. Apple is able to keep prices low and margins the same by locking up components for months and getting better prices than other companies. In addition even if Apple never creates a new market, there wil increase profits for years become of the massive growth left in the smartphone and tablet markets.

Log in