Apple (AAPL): Still the Unique Innovator without Jobs?

As a long-term investor in Apple (AAPL), I was accumulating more shares during 2008 as the market was spiraling downward, and stopped, guess I had to, when my cash ran out, sometime long before the market bottomed out (longer if the new lows it reached the first week of March were not the bottom). I had strong beliefs in Apple's growth potential, based on its international appearance, and another one was based on the future of the Mac computers. The sole cornerstone of this all was my belief in its unmatchable powers of innovation.

I'd like to admit that my research on AAPL was not thorough enough, because I had this unanswered question both before and after I jumped in, and I am still having the same question today: why no other companies are capable of coming up with anything to match the iPod? Bottom-line, it is just a MP3 player. Resource wise, there are many others that can match or beat Apple, the most obvious being Microsoft (MSFT).

So why it is Apple, Apple Only, and Again and Again Apple Only? Though I couldn't find any answers that I myself felt 100% satisfied with, all my reading seems to suggest that AAPL has established certain forms of corporate culture, a systematic way to encourage creative thinking and channel such creativity through the product development life-cycle. Once such a system is in place, its innovation became sustainable and in return, gave the company a significant competitive edge that is usually pretty difficult for competitors to surmount. This is the underlying theory of all my analysis of AAPL, including my Buy decision. However, I found my belief system cracked a little bit when several weeks ago, CEO Steve Jobs declared a medical leave with very slim chance to return to the helm again - at least according to some analysts.

Apple ranked high every year in various versions of the Most Innovative Companies list, side by side with companies such as Intel (INTC), GE, Microsoft, Amazon (AMZN), eBay (EBAY), P&G (PG), etc. However, if you look deeper, you can find the type of innovation that AAPL delivers is different from almost all the others.

1) The difference between Apple and companies such as eBay and Amazon is like the product vs. the business model. The main focus for eBay or Amazon is not to introduce new products to the world, and eBay is actually more interested in used stuff. But I always have the opinion that eBay may be one of the best business models ever invented in human history. To summarize, it is smart and lazy; smart, because it brings in fat margins; and lazy, because once it is in place, you just sit back and count the money that keeps flowing in.

Basically, Apple's innovation is never about its business model. Instead it sticks to a very traditional one - build something and then sell it above cost to make a profit. You can argue it is a revolution for Apple to combine iPod with iTunes, but this has more meaning for the digital music world than for the MP3 player, and I think ultimately the popularity of the music store was driven by the popularity of the MP3 player, not the opposite. Furthermore, I don't see anything new the way AAPL sell the iPhone. And in the Mac computer sector, again, nothing is truly fresh in the past 10 years - they still stick to and protect their bundling strategy, i.e. Mac OS is allowed to run on Apple computers only. I do believe this bundling strategy gives Apple some edge in software development, allowing it to stay elegant and creative by avoiding a face-off competition with Microsoft (read analysis here). Still, I don't believe this business model is anything innovative.

2) Similar to Intel and GE, Apple's innovation focuses on the product. However, for companies such as Intel and GE, they delve into brand new areas with only a handful of competitors having the expertise and resources to tap in. For example, Intel continuously made breakthroughs in the CPU technology, or GE introduced various means to generate green energy. Apple didn't actually invent MP3 players or smart phones. Rather, they just built on the existing concepts and innovate to revolutionize the user experience. Nothing explains this better than the iPhone, or another more recent example, the new iPod shuffle, the first MP3 player that 'speaks for itself', as they tout. In other words, these are innovations that interact with each individual customer.

From another perspective, we can say innovation for companies like Intel is more about implementation, the idea is already there - making the CPU run faster or running several of them together seamlessly. But for Apple, the innovation is more about bringing up the right ideas, and the implementation seems to be relatively easy.

I'd like to say the Apple's innovation is a lot more demanding, which requires more than placing the right talent in the right position. How difficult is it? Let's say this, there is only one company in the world that is capable of doing it. Microsoft tried with Zune, Dell (DELL) tried with Jukebox and Creative tried with Zen. They simply couldn't match up. For this very reason, Apple's innovation became the cornerstone of its competitive edge and the driver of its future growth. If a new version of iPod fails to impress or a new iPhone is something mediocre, then we may see their market share drop overnight. This is the pattern of competition in the technology world.

As this is so critical an element of Apple's success, we must question its sustainability. Steve Jobs must have played a critical role in this process of constant innovation. Apple sounds like a huge company on paper, but at the end of the day their product line is very simple and limited - several versions of MP3 players, one wireless phone, iTunes and several varieties of computers. I wouldn't be surprised to find out in retrospect that Steve Jobs actually controlled the entire product development process when he was at the helm. With Jobs leaving, can Apple really be the same constant innovator of unique products? I don't know. I admit I am a little nervous, and I am watching.

Disclosure: I am holding a long position in AAPL, but am considering selling it.